Scaling Beyond Single Clients With the 20% Concentration Rule
If you lost your largest client tomorrow, how much value would instantly vanish from your firm?
For founders preparing to transition out, whether through partner buy-in, strategic sale, or family hand-off, customer-concentration risk is one of the first red flags a buyer’s diligence team will circle in red ink. The benchmark most private-equity groups, banks, and valuation analysts apply is simple:
No single client should represent more than 20% of total revenue or total gross profit.
When a single relationship exceeds that threshold, three problems emerge:
| Risk | Impact on Owner | Impact on Valuation |
| Re-Negotiation Power | Client pushes pricing, scope creep, or extended terms. | Margin compression lowers trailing EBITDA. |
| Key-Man Dependency | Founder must stay involved to “keep them happy.” | Higher earn-out requirements, lower upfront cash. |
| Deal Fragility | One departure can tank forecasts. | Multiples drop 1–2× compared with diversified peers. |
1. Quantify the Exposure — Dashboards, Not Gut Feel
Pull the past twelve months of revenue and gross profit by client. Visualize it—ideally in the same “single-pane” dashboard you use for realization or utilization. If the top bar crosses 20%, highlight it. You now have a hard number to discuss with partners, lenders, and potential buyers.
Why gross profit, not just revenue? That’s the number diligence teams care about when they evaluate stability and pricing power.
2. Diagnose Profitability — Vanity vs. Sanity
A $1 million client that nets 12% profit is less valuable than a $ 400k client at 35%. High-maintenance accounts often “feel” indispensable because of the top-line splash—but they erode margin, tie up senior talent, and inflate working-capital demands.
Action checklist:
- Load-Leveling — Track hours, write-offs, and realization by engagement.
- Scope Alignment — Re-price or re-tier services that have drifted outside original scope.
- Advisory Uplift — Convert transactional projects into recurring advisory retainers where your expertise (not time) drives value.
3. Dilute, Don’t Detonate — Strategic Diversification
Dropping a marquee client outright rarely makes sense. Instead:
| Scenario | Playbook |
| Ideal Client, Oversized Share | Replicate them. Use a look-alike profile in outbound, peer referrals, or industry events. Goal: add 2–3 similar accounts so each settles < 15%. |
| Misaligned, Low Margin | Hold short-term, invest zero extra capacity, and back-fill with higher-fit prospects. When replacement revenue equals 120% of their gross profit, plan a respectful turnover or price reset. |
Pro tip for professional-services founders: diversify service lines as well as clients. Shifting 25–35% of revenue into high-margin advisory or retainer work evens cash flow and boosts multiples.
4. Systemize the Growth Engine — Repeatable, Trackable, Delegable
Your exit multiple will ultimately hinge on whether the pipeline works without you. Implement:
- Unified CRM + Marketing Automation — Track lead sources, conversion cost, and lifetime value.
- Ideal-Client Playbooks — Document outreach scripts, onboarding steps, and quarterly QBR agendas.
- Monthly KPI Cadence — Measure concentration, margin, and pipeline coverage at the leadership meeting, every month until you close your deal.
What Does “20% Ready” Look Like?
- Top five clients = ≤ 60% of revenue.
- No single client > 18% of gross profit.
- At least two recurring/advisory offerings with churn < 5%.
- Documented playbooks so any partner (not just the founder) can manage the account.
Firms that hit these marks routinely secure 1–2× higher EBITDA multiples and more cash at close because the buyer knows one phone call won’t crater next quarter’s numbers.
Ready to Pressure-Test Your Client Portfolio?
At Montage, we guide service business founders through the exact steps above, backed by dashboards, margin analytics, and 90-day quick wins. Our complimentary Strategy Session delivers:
- A concentration heat map of your current client mix.
- A profitability gap analysis by engagement.
- Three custom actions to de-risk and lift valuation—implementable in the next quarter.
Book your free session now and leave the call knowing precisely where to focus to protect—and grow—the value you’ve spent decades building.
→ Reserve Your Strategy Session
Build a firm that sells on your terms, at your number, without the stress of a single client holding the deal hostage. We’ll show you how.
Leo Manzione is the co-founder and Chief Advisor at Montage Method. He is passionate about helping business owners reclaim their time, scale smart, and build businesses that create both personal freedom and enterprise value.
When he’s not guiding founders through strategic transitions or developing new tools with the Montage team, you’ll likely find him swimming laps with an audiobook or exploring the trails of the Pacific Northwest with his wife.