Customer Concentration

This section identifies customer concentration as a top risk for lenders because small businesses often rely on just a few key clients. Heather defines concentration as one customer representing over 20 percent of revenue or the top three customers exceeding 40 percent. Lenders are particularly cautious because buyers frequently lose major clients shortly after a sale if the transition is poorly managed or if the seller neglected customer service during the deal process. To mitigate this risk, you must prove the business remains viable without its largest client by testing your debt coverage ratio to see if it stays at a one to one level. If the math fails, you can protect the deal by using a forgivable seller note that is tied directly to customer retention or by increasing your equity contribution to reduce bank leverage.