Customer concentration means a large share of a company's revenue comes from a small number of customers. In a small business acquisition it matters because the buyer pays for earnings that depend on those customers staying after the owner leaves. A quality of earnings (QoE) report measures concentration from the company's sales records, usually as the share of revenue from the top customer, the top 10 and the top 20, and tracks which customers came and went over the review period. The report states the figures. The buyer, the lender and their advisers decide what the figures mean for price, structure and the loan.
There is no single cutoff. Buyers and lenders commonly start asking questions when one customer is more than about 10% to 20% of revenue, or when the top five customers together are around half of it. The level that matters depends on the industry, the contracts and how hard the customer would be to replace.
Concentration can also sit outside the customer list. A business can be concentrated in one referral source, one platform, one government program or one general contractor that sends most of the work. A QoE looks at where the revenue actually comes from, which is sometimes different from the customer list in the Confidential Information Memorandum (CIM).
The QoE starts with a customer-level sales report from the company's accounting system, such as a sales by customer summary, for the full review period. It then checks that report against the total revenue on the profit and loss. If the customer report and the profit and loss do not agree, the difference is stated before any concentration figures are calculated, because a percentage built on an incomplete list can understate the largest customers.
| Measure | How it is built | What it shows |
|---|---|---|
| Top customer share | Largest customer's revenue divided by total revenue, by year | Exposure to one relationship |
| Top 10 and top 20 share | Revenue from the largest 10 and 20 customers, by year | How much of the business rests on a short list |
| Customer churn | Customers with revenue in one year and none in the next | How often revenue walks out the door |
| New customer revenue | Revenue from customers with no sales in the prior year | Whether losses are being replaced |
| Revenue trend by customer | Top customers' revenue across the review period and the trailing twelve months | Whether a large customer is growing, flat or fading |
The QoE also compares the customer list to the bank statements where it can. Large customers that pay by check, ACH or wire usually leave a visible trail in the deposits. A large customer on the sales report with no matching receipts is a question for the company, and the report says so plainly rather than assuming the cash came in. The deposit testing behind this is covered in what red flags a QoE looks for.
The price of a small business is commonly set as a multiple of earnings. If a large customer leaves after closing, the earnings drop and the buyer has paid a multiple on profit that is no longer there. The loan payment does not drop with it.
Lenders look at the same risk from the debt side. They underwrite the loan on cash flow, and a lost customer reduces the cash flow available for debt service. How lenders measure that coverage is covered in how SBA lenders calculate DSCR on a business acquisition. A lender may ask for more equity, a smaller loan, or added structure when the top customers make up a large share of revenue. What a given lender requires is a question for that lender.
Concentration also interacts with the owner. In many small businesses the largest customers deal directly with the owner. If the relationship is personal, the transition plan matters as much as the contract.
For the largest customers, the QoE typically asks the company for:
The QoE records what the documents show and what the company said in the Q&A. It does not predict whether a customer will stay. Contract interpretation, including what a change of control clause means for the deal, is a question for your attorney.
These are round, invented numbers for illustration only. A company has $3,000,000 of revenue and $600,000 of adjusted EBITDA for the year. The sales by customer report agrees to the profit and loss.
| Group | Revenue | Share of total |
|---|---|---|
| Top customer | $750,000 | 25% |
| Top 5 customers | $1,500,000 | 50% |
| Top 10 customers | $1,950,000 | 65% |
| All other customers | $1,050,000 | 35% |
| Total revenue | $3,000,000 | 100% |
The buyer wants to know what happens if the top customer leaves. Assume the company's variable costs on that work, including materials and direct labor that would no longer be needed, are 70% of the revenue. The lost revenue of $750,000 removes about $225,000 of EBITDA, so adjusted EBITDA falls from $600,000 to about $375,000.
| Line | As reported | Without the top customer |
|---|---|---|
| Revenue | $3,000,000 | $2,250,000 |
| Adjusted EBITDA | $600,000 | $375,000 |
| Implied price at 4.0x | $2,400,000 | $1,500,000 |
The QoE would show the concentration table and the customer's revenue across the review period. A sensitivity like the second table is a tool for the buyer and lender to run. It is not a finding that the customer will leave, and the 70% variable cost figure would need support from the company's own cost records before anyone relied on it.
Concentration more often changes the terms than ends the deal. The common tools:
| Tool | How it works | What to confirm |
|---|---|---|
| Customer contracts | Longer terms, renewals or assignment consents signed before closing | Whether the customer will sign, and what the contract allows on a change of ownership |
| Earnout | Part of the price is paid later only if revenue or earnings hold up | Whether your lender allows it and how the terms are written |
| Holdback or escrow | Part of the price is held for a period and released if the customer stays | The release conditions and who controls the funds |
| Note carried back by the business owner | The owner finances part of the price, with payments tied to performance in some cases | How the lender treats the note, including any standby terms |
| Transition support | The owner stays on for a set period to introduce the buyer to key customers | The length, the role and what the owner is paid |
| Price | A lower multiple to reflect the risk | How the lower price affects the loan and the equity injection |
On SBA-financed deals, some of these tools have their own rules. Ask your lender and your attorney what is allowed on your loan before building it into the letter of intent. When findings change the earnings figure, the options are similar to those covered in what happens if the QoE finds lower EBITDA than the CIM.
In our reports, the customer analysis sits beside the revenue testing. It shows the concentration figures by year and for the trailing twelve months, the movement in the top customers, churn and new customer revenue, and any differences between the customer report and the profit and loss. Open questions go to the Q&A tab, which the buyer should review in full, since it holds items the summary does not repeat. The layout is shown on the sample report page, and the procedures are listed on the quality of earnings page.
We have completed more than 600 QoE engagements and take on about 40 a month.
Not by itself. Many profitable small businesses have a few large customers. What matters is how stable those relationships are, what the contracts say, and whether the deal terms account for the risk. That decision belongs to the buyer, with the lender and an attorney.
Sometimes, usually late in the process and with the business owner's agreement. The timing and the terms are set by the letter of intent and any confidentiality agreement, so check with your attorney first.
The requirement under SBA SOP 50 10 8.1, effective October 1, 2026, is based on price, not concentration. Initial Acquisition and Business Expansion loans where the business purchase price is $3 million or more need a QoE from an independent financial professional engaged by and acting on behalf of the lender. Below that, ask your lender what it requires.
Our fee is $7,500 flat for SBA-sized deals, whether or not SBA financing is used, and larger deals are scoped and priced to the work after a call, with the fee quoted before work starts. There is no hourly billing. The work generally takes two to four weeks from receipt of documents. Details are on the pricing page.