Why Revenue Concentration Is Usually a Management Problem — Not a Customer Problem

Category: Risk & Operations
Read Time: ~5 minutes

Revenue concentration is one of the first risks flagged in lower-middle-market deals.

When a small number of customers represent a large share of revenue, buyers instinctively worry about dependency and downside. The concern is valid — but it is often misdiagnosed.

In most cases, revenue concentration is not primarily a customer issue.
It is a management and operating model issue. 

Concentration Is an Outcome, Not a Root Cause

Customers do not concentrate themselves by accident.

Revenue concentration usually reflects a series of internal decisions: where management focused sales effort, which customers were prioritized, how pricing was negotiated, and what kinds of relationships were allowed to deepen over time.

The concentration is visible.
The behavior that created it is not.

How Management Choices Create Concentration

In many businesses, concentration forms gradually.

Management leans into the customers that are easiest to serve, most responsive, or most familiar. Sales resources follow revenue. Over time, processes, pricing, and service levels become tailored to a small set of accounts — often without explicit intention.

From the inside, this feels efficient.
From the outside, it looks risky.

Why Buyers Blame Customers Instead

It is easier to frame concentration as customer risk than as management design.

Customer risk feels exogenous — something that happens to the business. Management risk implies that strategic decisions, incentives, and priorities must change. That is a harder conversation.

As a result, buyers often underwrite concentration as something to “work around” rather than something to fundamentally address.

When Concentration Becomes Truly Dangerous

Concentration becomes acute when the business lacks alternatives.

If the sales engine cannot reliably acquire new customers, if pricing discipline is weak, or if service delivery is customized around a few accounts, concentration is no longer just a statistical risk. It becomes structural.

At that point, diversification is not a quick fix. It requires rebuilding capabilities that were never developed.

What Diligence Should Focus On Instead

Rather than asking only how concentrated revenue is, stronger diligence asks why it looks that way.

It examines whether the business has a repeatable sales process, whether customer acquisition is intentional or opportunistic, and whether the organization knows how to say no. It looks at how pricing decisions are made and who actually owns customer relationships.

These answers matter more than the percentage itself.

Practical Takeaway

Revenue concentration should be treated as a signal, not a verdict.

If concentration exists alongside a disciplined sales engine and clear customer strategy, it may be manageable. If it exists because the business never built alternatives, it will be difficult to unwind — regardless of how attractive the current numbers look.

Diversification is an operating capability, not a post-close initiative.

 Closing Thought

Customers do not create concentration on their own.

They respond to incentives, attention, and structure. When revenue concentrates, it is usually because the business was designed — intentionally or not — to allow it.

Understanding that distinction is the difference between managing risk and inheriting it.