When one client makes (or breaks) your tech-services firm, is it a golden goose or a grenade? In this Shoot the Moon episode, Mike, Ryan, and Matt unpack the high-stakes world of customer-concentrated M&A: red-flag myths vs. revenue rocket fuel, how strategics turn “50% with five clients” into diversification wins, and the deal structures that keep everyone smiling if the anchor customer drifts. Tune in for smart war stories, valuation hacks, and playbooks that turn concentration risk into closing-day upside.
EPISODE 226. This episode begins with the vocal stylings of Ashley Battel from the Revenue Rocket Outreach team.
EPISODE NOTES:
• Customer concentration in IT‑services M&A is it a hero or risk?
• Concentrations of 20–50%+ revenue across 1–5 anchor clients are common.
• Evaluate revenue/profit trajectory, contract history, and relationship depth to size risk.
• Strategic buyers often welcome concentration for cross‑sell upside; financial buyers discount or structure.
• Deal mechanisms (earn‑outs, hold‑backs, gain‑share “circuit breakers”) protect all parties if the key client churns.
• Valuation impact: risk is typically offset with structure rather than outright price cuts.
• Pre‑sale de‑risking: broaden touchpoints, add contract vehicles, and build succession around the anchor client.
• Diversification upside: the right acquirer may reduce their own concentration and grow wallet share.
• Bottom line: understand the full picture, concentration can fuel growth instead of derailing deals.
RELATED EPISODES:
Mike Harvath: Hello and welcome to this week's Shoot the Moon podcast, broadcasting live and direct from Revenue Rocket World Headquarters. If you tune into our podcast on a regular basis, you know that Revenue Rocket is the world's premier M and A advisor to tech‑enabled services companies. Wow, what an intro from Ash Patel—our team created a special “Crazy Train” voice‑over, and he’s been known to break that out on our daily check‑ins from time to time, so hopefully you enjoyed it. With me today are my partners, Ryan Barnett and Matt Lockhart. Welcome, guys.
Matt Lockhart: Good to be here—and rest in peace, Ozzy Osbourne. He was something, but man, great music! Ash is amazing at what he does. Great to be here, Ryan. I know we’ve got an interesting topic, but first—get your arcs ready, folks—because up here in Minnesota we’re getting a lot of rain today. Holy smokes, Ryan, what’s going on?
Ryan Barnett: It’s definitely cloudy. Today we’re tackling a big subject we hear about all the time. Since we focus on M&A for IT‑services companies worldwide, we constantly run into one question: when a seller has a large account that makes up a big part of the business, is that biggest client a hero—or a risk? In our world, almost every IT‑services firm shows some level of customer concentration. So, Mike, it’s common to see one customer making up 20, 30 , 40 or even 50‑plus percent of revenue. Why does that happen in IT services, and should a buyer see it as a red flag or an opportunity?
Mike Harvath: Like many things, it’s a gray area. I personally don’t get too concerned about concentration—provided that the revenue quality and profit trajectory tied to that concentration have been up‑and‑to‑the‑right. We often see IT‑services businesses where 50% or more of revenue sits with fewer than five clients. The buyer’s worry is that, if that customer walks, the return thesis blows up and they may have overpaid. While that’s true, you need to understand the relationship quality, the revenue and profit impact, and—more importantly—the company’s overall growth trajectory to decide whether concentration is a risk or an opportunity.
Ryan Barnett: Great point. Sometimes you’ve got that anchor client that funds the foundation of the entire business. Many owners have literally founded their firms off one big client. So it’s common—and understandable that buyers raise the risk flag. Matt, when you see these large concentrations, what’s the typical buyer reaction, and how do we coach them to address the risk?
Matt Lockhart: Mike nailed the first part. I’d add forecasting. What’s the forward outlook with that customer based on the relationship and the seller’s knowledge of the business? You look at historical contracts, how critical the work is, and the longevity of the relationship. There’s the hard diligence data and the softer factors—both matter. I’ve lived it: one large foundational customer often leads to another and another. That’s how you scale your processes and your team. It’s an opportunity, not just a risk.
Ryan Barnett: Exactly. Buyers see the difference between strategic and financial acquirers here. A financial buyer might discount heavily for concentration risk. A strategic buyer—especially another digital‑transformation or application‑development shop—may see huge cross‑sell and upsell potential because the relationship foothold is already strong. Mike, do you see a big gap between buyer types when they evaluate concentration risk?
Mike Harvath: Definitely. Strategic buyers in a similar business often live with the same dynamic—five clients can be 50% of their own revenue—so they’re comfortable. In other sectors, like MSPs serving lots of SMBs, concentration is low and that’s attractive to financial buyers. But in channel or digital‑transformation firms, enterprise clients have capacity to buy more, so concentration is natural. For strategics, an acquisition can actually reduce their own concentration through diversification. Financial buyers usually need a platform or very clear understanding of the risk to jump in.
Ryan Barnett: Let’s flip to valuation. If I’m a seller with 20–30% of revenue in one client, should I expect a haircut on enterprise value?
Matt Lockhart: Maybe not on total value, but expect structure—often an earn‑out—tied to that customer or overall growth. If you’re comfortable with the relationship and forecast, lean into structure to maximize value. Rolling equity is another way to show you’re in it to win it. If you want a quick exit, the buyer may price the risk directly into a lower cash value.
Ryan Barnett: And, Mike, in an LOI or definitive agreement where there is concentration, what provisions should a seller expect?
Mike Harvath: You’ll typically see a hold‑back or gain‑share tied to retaining the key client—think of it as a “circuit‑breaker.” As long as the customer stays, no penalty; if they leave, there’s a value haircut. It aligns interests. If you insist on all‑cash with high concentration, be ready for a big discount. Most deals share the risk.
Ryan Barnett: That deal structure point is huge. Matt, founders often remain the sole point of contact with that big customer. How should sellers de‑risk before going to market, and how involved should they stay post‑transaction?
Matt Lockhart: Surround the customer with your team—not just you. Show depth, multiple contract vehicles, and processes that ensure consistent service. That lowers buyer risk and opens cross‑sell potential. Remember, the strategic fit should make 1 + 1 = 4 or 6—not just save one relationship.
Ryan Barnett: Great advice. Customer concentration happens—we see it in firms big and small. Keep relationships strong, build continuity beyond the founder, and use thoughtful structure to maintain value. Mike, any closing thoughts?
Mike Harvath: Don’t let concentration scare you. Understand the full picture. If you do, you’ll evaluate opportunities more accurately and avoid dismissing a solid deal.
Ryan Barnett: Thanks for tuning in. We’ll unpack more M&A insights next week. Make it a great week!