Client Concentration

There's a number that I ask every agency founder I meet, and most of them don't know it: what percentage of your revenue comes from your biggest client.

I've had people guess 20% and it turns out to be 55%. The client has been there eight years, pays on time, never causes trouble. The relationship feels solid. And it might well be. But from a valuation perspective it doesn't matter how solid the relationship is — what matters is what happens to the business if it ends.

Above 30% is a significant problem if you're thinking about selling. Not because buyers won't buy, but because they'll price the risk in, usually quite aggressively. A business where one client leaving would materially change the P&L (and by extension the multiple) is a different kind of business from one where it wouldn't.

The fix tends to be three things happening at the same time: winning new clients at a faster rate, deepening the relationship with the big one so it becomes harder to exit, and systematically growing revenue from your existing clients. Fifty percent of your growth should be from your existing clients.

Start by knowing your real client concentration number. It's one of those things that looks fine until you look at it properly.

scorecard.felixvelarde.com — takes 2 minutes.