PREMIERE- Brandon & Amanda Neely Small Biz owner wealth planners

 

From Barista to Wealth Planners for Small Business Owners

New Interview guest- Brandon & Amanda Neely CFP.

I’m happy to have The Neeley’s join me for a one-on-one interview!

They’ve got experience running a small business just like yours or the one you might run one day.

Tune in and as we’ll be discussing the story of tragedy in their business, how they recovered and what they learned from my latest book.

This is a ‘must see event’ for anyone who owns or will own a business one day.

Set yourself a reminder on YouTube here: https://youtu.be/1H4uPZ9r1s0 

It will be going live Monday September 29, 2025 at 1 PM Atlantic Time 12 Noon Eastern Time

See you there!

David C Barnett

How I Became a Broker (and What Small Business Owners Need to Know About Bank Loans)

 I recently had an email exchange with Chris in California who asked me about my life before I started doing private investment deals. His question sparked some memories and stories I thought would be useful to share here. https://youtu.be/uyJP7yb70hE

From Yellow Pages to Entrepreneurship

After finishing university, I began my career in outside sales with the Yellow Pages. Eventually, I left and started a small business with a friend, which I ran for nearly two years before selling.

After that, I became a commercial debt broker. I took a training seminar in Toronto with a California company called The Loan Consultants. They taught me how to:

• Package loan applications properly,
  
  

• Structure equipment leases (both capital and operating),
  
  

• Prepare commercial mortgage applications, and
  
  

• Arrange factoring facilities (selling receivables for immediate cash).
  
  

That training gave me the technical foundation to step into the world of financing.

How I Marketed My Services

This was 2005, and while I used the internet, I didn’t leverage it the way I do today. Instead, I created a mailing list—yes, actual postal mail!—and targeted financial planners, commercial bankers, accountants, and business-focused lawyers.

Every two months, I mailed out letters highlighting deals I had completed. For example: “I helped finance kitchen equipment for a restaurant.” These success stories generated phone calls and referrals.

Why Bankers Were My Best Referral Source

Interestingly, my biggest referral source turned out to be bankers. Here’s why:

When a small business owner asked their bank for a loan and got declined, they often risked taking all their accounts—savings, mortgages, investments, business banking—to another institution.

To prevent losing the relationship, many bankers referred those clients to me. They knew I could place the deal with a leasing company or alternative lender—without threatening their other business.

A Big Misconception About Bank Loans

Most small business owners believe their banker makes the lending decision. The truth? At large national banks, loan officers are salespeople. Their job is to bring in deals, not approve them.

If a banker believes in your project, they’ll sell it “upstream” to underwriting. But if you’re disorganized, lack projections, or can’t clearly explain how the loan will improve your business, they won’t waste time fighting for your file. They have quotas to hit.

My Role as a Broker

Many clients told me they were “declined by the bank.” I’d ask, “Did you actually submit a formal application, or did the banker just say no?”

Usually, the banker had just brushed them off. In those cases, I would:

• Create a professional loan package,
  
  

• Include resumes, business history, cash flow projections,
  
  

• Show exactly how the funds would increase revenue, reduce costs, or improve capacity, and
  
  

• Demonstrate how the bank would get repaid.
  
  

About 75% of the time, I could take the same client back to the very same bank—and over half of those files ended up approved.

The difference wasn’t the business. It was a presentation.

The Lesson for Small Business Owners

Most entrepreneurs know how to run their businesses, but many don’t know how to present their case in a way that lenders can understand. That gap was my job to fill as a broker, and it taught me what lenders are really looking for.

It also gave me the confidence to later start doing my own private deals.

👉 Want deeper dives like this? Join my email list at DavidCBarnettList.com  for early access to videos, insights, and 7 free bonus gifts.

A Great Interview with Brody Vinson

 

I had a great conversation with Brody Vinson where we discussed my journey as an M&A professional, my experiences buying and selling businesses, and insights from my new book, 21 Stupid Things People Do When Trying to Buy a Business.

Silver Tsunami 2025 Explained | Baby Boomer Business Sales & Closures

The Silver Tsunami: Are Baby Boomer Businesses Really a Buying Opportunity?

Millions of baby boomer business owners are approaching retirement. Does that mean we're about to see an enormous wave of profitable small businesses for sale at bargain prices?

That's the promise behind the so-called silver tsunami business opportunity.

You've probably heard the story. Baby boomers own millions of businesses, they're getting older, and eventually they'll need to sell. With so many businesses entering the market, prices should fall, creating incredible opportunities for aspiring entrepreneurs.

It sounds logical.

But after years of working with small business buyers and sellers, I think this narrative leaves out some very important realities.

Not every business is worth buying. Not every business owner is prepared to sell. And not every profitable business can support the financing required for a new owner to purchase it.

I've been questioning the silver tsunami narrative for years. Back in 2019, I discussed it with Mike Finger in an interview called Surfing the Silver Tsunami.

The concerns we raised then remain relevant.

So let's examine what the silver tsunami actually means for small business acquisitions, why many baby boomer businesses may never be sold, and where I believe the real opportunities exist.

What Is the Silver Tsunami in Small Business?

The term silver tsunami describes the anticipated wave of business ownership transitions as baby boomers retire.

The basic argument is straightforward.

Millions of businesses are owned by people approaching retirement age.

Eventually, those owners will want to exit.

That should create a significant increase in businesses available for acquisition.

And if the supply of businesses rises faster than buyer demand, the assumption is that prices will fall.

An Entrepreneur Magazine article published in January 2025 described approximately 12 million baby boomer-owned businesses as potentially available for transition in the United States.

It's an attention-grabbing number.

But there's a big difference between a business owned by someone approaching retirement and a business that's actually available, transferable, profitable, and worth purchasing.

That's the distinction I think gets lost in much of the online conversation.

Why Millions of Baby Boomer Businesses Won't Necessarily Be Sold

Here's something I've learned from reviewing financial statements from hundreds of businesses.

A business can be successful for its current owner without being a particularly attractive investment for someone else.

Suppose someone owns a business that generates $100,000 annually for them.

That sounds pretty good.

But what if managing that business requires 50 or 60 hours of work every week?

And what if someone with similar skills and experience could earn $100,000 working for another company?

In that situation, the owner may have created a job rather than a valuable, transferable business.

The business supports their lifestyle, but it doesn't necessarily generate meaningful earnings beyond the value of their own labour.

This is a distinction I think every aspiring business buyer needs to understand.

A Business That Pays Its Owner Isn't Necessarily a Good Acquisition

Imagine buying that business for $400,000.

Now you have to operate it, service the acquisition debt, maintain the equipment, and deal with unexpected expenses.

If the business only generates enough cash to compensate someone for managing it, where is the money going to come from to repay your investment?

This is one reason I don't believe the silver tsunami will automatically produce an enormous inventory of attractive acquisitions.

Some businesses simply don't generate enough cash flow to justify a meaningful purchase price.

Others may be profitable only because their current owners have paid off the equipment and other investments over decades.

A buyer who must borrow money to purchase those same assets faces a completely different financial situation.

The Business Succession Planning Gap

Even when a business is profitable, that doesn't mean it's ready to be sold.

This is another important problem with the silver tsunami narrative.

Many business owners assume that when they're ready to retire, they'll advertise the business, find a buyer, and complete the transaction.

But selling a business is much more complicated than that.

A buyer needs to understand the company's financial performance, operating systems, customer relationships, employees, and future risks.

And the seller needs to demonstrate that those elements can be transferred successfully.

Why Exit Planning Matters

In my original discussion, I referenced Canadian surveys suggesting that many business owners expected to exit within the following decade, while only a small percentage had actionable succession plans.

The exact figures and survey dates should be independently verified before being treated as current statistics.

But the underlying issue is something I encounter regularly.

Business owners are often experts at delivering their products or services.

They're not necessarily experts at selling businesses.

They may have spent decades learning how to operate their companies without ever learning what a buyer or lender needs to see before approving an acquisition.

This creates what exit-planning professionals often call the succession planning gap.

Owners want to exit, but their businesses aren't ready to change hands.

What Makes a Business Transferable?

Buyers want confidence that the company will continue generating cash flow after the current owner leaves.

That means they need to understand how the business operates.

Are there documented procedures?

Can employees make decisions without the owner?

Will customers continue doing business with the company after the sale?

Can a new owner maintain the company's profitability?

If those questions can't be answered convincingly, the buyer may decide the risk is too great.

And that brings us to a possibility that doesn't receive nearly as much attention as the promise of bargain acquisitions.

The Silver Tsunami May Cause More Business Closures Than Sales

What happens when a baby boomer business owner wants to retire but can't find a buyer?

Sometimes the business simply closes.

The owner sells the equipment, collects outstanding receivables, pays remaining obligations, and shuts down operations.

It's not necessarily the retirement outcome they hoped for.

But it may be the only practical option.

This is why I think the silver tsunami could have a very different effect from what some online commentators are predicting.

As I put it in my discussion:

“The silver tsunami may wash away businesses rather than float them into new hands.” —David C. Barnett

That's a very different outcome from millions of successful companies changing ownership at discounted prices.

Business Closures Create Opportunities Too

Interestingly, this doesn't mean the silver tsunami will have no economic opportunities.

Suppose a local business closes because its owner retires.

Its customers still need the products or services they were purchasing.

Where will they go?

Probably to other businesses in the same market.

That creates opportunities for existing competitors.

A plumbing company might gain customers when another plumbing company closes.

A local manufacturer might receive new inquiries when a competitor shuts down.

And a service business might be able to expand without purchasing another company's assets or assuming its liabilities.

In some cases, the opportunity may be to capture customers from retiring competitors rather than acquire the competitors themselves.

I think that's an important part of the silver tsunami discussion that often gets overlooked.

Will the Silver Tsunami Make Small Businesses Cheaper?

One of the most popular claims about the silver tsunami is that a flood of businesses for sale will create a buyer's market.

The logic is based on supply and demand.

More businesses for sale should mean lower prices.

But small businesses aren't interchangeable commodities.

A profitable company with reliable cash flow, experienced employees, established systems, and reasonable capital requirements isn't equivalent to an owner-dependent business with declining revenue and aging equipment.

They're entirely different investment opportunities.

Good Businesses Still Attract Strong Buyer Demand

When I worked as a business broker during the recession around 2009 and 2010, I noticed something interesting.

If I listed a good business that operated during normal weekday hours and generated more than $100,000 in seller's discretionary earnings, I could receive around 25 inquiries within the first 48 hours.

That was during a recession.

And it illustrates something important.

There has long been strong demand for businesses that offer attractive cash flow and manageable operating requirements.

Inflation has changed what buyers consider attractive earnings, but the underlying principle remains.

A good business doesn't automatically become cheap simply because other businesses are entering the market.

In fact, experienced buyers may compete aggressively for the relatively small number of businesses that meet their acquisition criteria.

Why Seller's Discretionary Earnings Can Mislead New Buyers

I see another problem developing alongside the silver tsunami hype.

People with little business experience are being encouraged to purchase companies based on simple multiples of seller's discretionary earnings.

Seller's discretionary earnings, or SDE, is commonly used when valuing smaller owner-operated businesses.

It generally reflects earnings available to an owner-operator before certain adjustments, including the owner's compensation.

But here's the important part.

SDE isn't the same thing as passive investment income.

An Example of Overpaying for a Small Business

I came across a university student discussing a plan to purchase a business generating between $250,000 and $700,000 in SDE.

The student expected to pay three to five times SDE, operate the business for several years, and eventually hire a manager.

I found the assumptions concerning.

Let's use the lower end of that range.

Suppose you purchase a business generating $250,000 in SDE.

You pay three times SDE.

That's a purchase price of $750,000.

Now suppose the market value of your full-time work managing that business is $100,000 annually.

After accounting for that labour, you're left with approximately $150,000 before considering acquisition debt service, taxes, and capital expenditures.

You've effectively paid five times that adjusted $150,000 earnings figure.

And that's before evaluating whether the company's cash flow is sustainable.

What happens if you pay five times SDE instead?

The financial pressure becomes even greater.

This is why I get concerned when people talk about buying businesses based on simple valuation multiples without understanding the underlying economics.

You need to understand the difference between SDE and EBITDA before making acquisition offers.

And you need to understand how the purchase price affects your ability to operate the business after closing.

Why Capital Expenditures Matter When Buying a Business

Another factor that gets overlooked in small business acquisition discussions is capital expenditure, commonly called CapEx.

CapEx includes spending on equipment, vehicles, machinery, and other long-term assets.

Imagine you're considering two businesses.

The first is a consulting firm with relatively little equipment.

The second is a manufacturing company with expensive machinery that needs periodic replacement.

Both generate similar EBITDA.

But the manufacturing business may require substantial ongoing capital investments to maintain its earnings.

If you borrow heavily to acquire that company, you'll need enough cash flow to service the debt and replace equipment when necessary.

A valuation based only on EBITDA may not fully reflect those future cash requirements.

This helps explain why some businesses are difficult to sell even when their current owners are earning a reasonable living.

The existing owner may have paid off the equipment years ago.

A new buyer has to finance the acquisition and may also need to fund future replacements.

The economics can change dramatically.

Seller Financing Is Another Barrier to Business Acquisitions

Even when a buyer finds a profitable, transferable business, the transaction still has to be financed.

Most buyers don't simply write a cheque for the entire purchase price.

They contribute some of their own money and arrange financing for the balance.

That financing might involve a bank, an SBA-backed loan in the United States, or financing provided by the seller.

And seller financing can be particularly important when traditional lenders won't provide the full amount required.

Why Buyers and Sellers Disagree About Financing

In my original discussion, I referenced a BizBuySell survey reporting that 62% of buyers expected seller financing, while only 23% of sellers were willing to offer it.

Those were survey findings from the period discussed in the transcript, not verified current market figures.

But the mismatch illustrates a challenge I encounter regularly.

Buyers often want sellers to finance part of the transaction.

Sellers frequently prefer to receive their money at closing.

So how do you bridge that gap?

It starts with understanding the relationship between the buyer and seller.

Don't Ask for Seller Financing Before Building Trust

One of the mistakes I see inexperienced buyers make is asking sellers for financing during their very first conversation.

Think about what you're doing.

You're meeting someone who doesn't know you.

They don't understand your experience, your financial position, or your plans for the business.

And you're immediately asking them to lend you money.

Why would they feel comfortable doing that?

As I've explained when discussing seller financing:

“You don't go and meet a seller on the first day and say, hey, by the way, will you finance this for me?” —David C. Barnett

There are ways to structure seller financing even when a seller initially resists the idea.

But those conversations require preparation, negotiation, and trust.

Simply asking every seller whether they'll finance your acquisition isn't a serious strategy.

Why Retirement Doesn't Automatically Mean a Business Will Be Sold

There's another assumption behind the silver tsunami narrative that I think deserves attention.

People often assume business owners sell because they reach retirement age.

But retirement is only one reason people exit their businesses.

Other common reasons include burnout, boredom, fatigue, divorce, relocation, and poor health.

In other words, business sellers come from many age groups.

And some highly successful business owners may never need to sell.

Imagine someone who has built a profitable company with strong management systems and capable employees.

They may be able to retire from daily operations while continuing to own the business.

Why would they necessarily sell an asset that produces attractive cash flow?

The assumption that every baby boomer business owner will eventually put their company on the market simply doesn't reflect how all privately owned businesses operate.

Where the Real Silver Tsunami Opportunity Exists

So if the silver tsunami doesn't guarantee a flood of cheap, profitable businesses, where is the opportunity?

I believe it's with prepared buyers who know exactly what they're looking for.

Not people who want to buy any business they happen to find.

Not people who believe they can purchase an unfamiliar company and immediately hire someone else to run it.

I'm talking about buyers who understand a particular industry, know how to evaluate businesses, and have the resources needed to complete an acquisition.

Know Exactly What Kind of Business You Want

I regularly encourage buyers to develop clear acquisition criteria.

What industry do you understand?

What size of business can you afford?

What kind of operating experience do you have?

What level of cash flow do you need?

What capital expenditure requirements can you manage?

What risks are you prepared to accept?

If you can't answer those questions, you're probably not ready to start making offers.

Prepare Your Financing and Advisory Team

A serious buyer should understand their available financing before pursuing a transaction.

You also need appropriate professional advisors.

That may include an accountant, lawyer, lender, and experienced acquisition consultant.

When you identify a business that meets your criteria, you should be able to evaluate it efficiently and decide whether further investigation makes sense.

Be Ready to Act on the Right Opportunity

One of the members of my Business Buyer Advantage group coaching program has completed multiple acquisitions across different countries.

He's able to pursue opportunities because he knows what he wants, understands the economics, and has developed a repeatable acquisition process.

He doesn't need to spend months trying to decide whether a business fits his objectives.

He can evaluate an opportunity, make a decision, and move forward when the numbers work.

That's the kind of buyer who can benefit from ownership transitions.

And those are the buyers you'll be competing against.

Buying a Business Isn't a Passive Investment

I want to address one final part of the silver tsunami hype.

There's a growing narrative that you can buy a boring business, install a manager, and collect the profits while someone else does the work.

I think this is dangerous advice for inexperienced buyers.

Small businesses are risky.

Customers can leave.

Key employees can resign.

Equipment can fail.

Competitors can change their strategies.

And the new owner may discover that the seller performed important tasks that weren't properly documented.

If you buy a business in an industry you don't understand, you're going to have to learn.

The question is whether you can afford the mistakes you'll make during that learning process.

As I warned in the original discussion:

“The question is, can you afford to survive long enough until you learn?” —David C. Barnett

That's especially important when you're financing the acquisition with substantial debt.

If you invest nearly all your available cash into the down payment, you may not have enough money left to handle unexpected problems.

Keep Financial Reserves After Closing

One of the most important recommendations I make to buyers is to maintain financial resources outside the money they're investing in the transaction.

You may need additional cash during the transition.

Perhaps you lose a major customer.

Maybe a key employee leaves.

Or an unexpected equipment problem creates a large expense.

These things happen.

And the first few years after an acquisition can be particularly challenging.

You need enough financial flexibility to manage those problems without immediately putting the business at risk.

What the Silver Tsunami Means for Business Owners Planning to Retire

If you're a baby boomer business owner, I think the silver tsunami discussion should motivate you to prepare rather than assume buyers will be lining up.

Start by understanding what your business is actually worth.

Then examine whether the company is transferable.

Are your financial records reliable?

Can someone else manage the operation?

Are important processes documented?

Would a buyer be able to finance the acquisition?

And how long would it take to correct the problems you discover?

Some improvements may require several years.

That's why waiting until you're ready to retire can be a costly mistake.

The earlier you understand your business's likely selling price and the obstacles to a successful transaction, the more options you'll have.

The Bottom Line: Is the Silver Tsunami Real or Just Hype?

The demographic shift is real.

Millions of baby boomer business owners will eventually step away from their companies.

But that doesn't mean millions of attractive businesses will become available at bargain prices.

Some businesses will be sold.

Others will be transferred within families or to employees.

Some owners will retain ownership while professional managers operate their companies.

And many businesses may simply close.

Meanwhile, strong businesses with sustainable cash flow will continue attracting serious buyers.

That's why I don't believe the silver tsunami is a shortcut to easy business ownership.

The real opportunity isn't waiting for millions of cheap businesses to appear. It's becoming the kind of prepared, knowledgeable buyer who can recognize and successfully acquire a good business when one becomes available.

And if you're a business owner approaching retirement, the opportunity is to start preparing now so your company has a realistic chance of being sold rather than shut down.

Get Help Buying or Selling a Small Business

If you're serious about buying a business, my Business Buyer Advantage program provides online training, group coaching, and consulting services to help you evaluate opportunities, understand financing, negotiate transactions, and manage acquisition risks.

Explore Business Buyer Advantage

If you're a business owner planning your eventual exit, my team can help you understand your company's Most Probable Selling Price and identify issues that may affect its saleability.

Learn How to Prepare and Sell Your Business

The sooner you understand the economics of your next business transaction, the better prepared you'll be to make decisions that protect your financial future.

LIVE- David Morgan- what's up with gold and silver

 

Nosebleed commodity prices

New Livestream guest- David Morgan

I’m happy to have David join me on a live broadcast.

I was going to have David on to discuss how he evaluates the worthiness of mining stocks.

It’s all about proven reserves and extraction costs.

But hey, Gold is hitting all-time highs and silver is on a tear so we’d better just talk about that too, right?

This is a ‘must see event’ for anyone who might do some investing some day.

Be sure to join live so that you can ask questions, replay will be available.

Set yourself a reminder on YouTube here: https://youtube.com/live/jeXwmy9lHag 

We’ll be going live Monday September 22, 2025 1PM Atlantic Time and 12 Noon Eastern Time

See you there!

David C Barnett

What You Need to Know About Merchant Cash Advances (Business Cash Advances)

 I want to share a story about a financing tool I once used for a client back in my loan-broker days: the Business Cash Advance, sometimes called a Merchant Cash Advance (MCA). https://youtu.be/R4SXiFQHhNo 

The Client Story

My client was at a family-owned restaurant. Like many small restaurants, their financial performance on paper didn’t look strong enough for traditional financing:

• They had modest profits, about equal to what the three family members might have earned if they were employees elsewhere.
  
  

• They likely had some unreported cash sales.
  
  

• They ran personal expenses through the business, reducing reported profits further.
  
  

As a result, their financial statements didn’t qualify them for conventional loans.

The Merchant Cash Advance Solution

Here’s how an MCA worked for them:

• The restaurant received $10,000 upfront.
  
  

• The lender added a 25% fee, so the total owed was $12,500.
  
  

• Instead of fixed monthly payments, the MCA company took a percentage of daily/weekly debit and credit card sales directly from the payment terminal until the $12,500 was fully collected.
  
  

For example, if the restaurant ran $1,000/week through their terminal, and the lender claimed 5%, then $50/week would go straight to repayment.

What MCA Lenders Look For

1. Sales Volume – Past statements from the card terminal are reviewed to ensure steady transactions.
   
   

2. Lease Length – If you don’t own your building, the lender wants enough time left on your lease to be confident they’ll get repaid.
   
   

The True Cost of MCA Money

While convenient, MCAs are incredibly expensive capital.

If you pay a 25% fee and repay steadily over a year, the effective interest rate is well over 40% once you account for the fact that you’re repaying the principal almost immediately.

I explain this in detail with examples in my book Invest Local, where I also break down how to calculate the true cost of different kinds of loans.

My Take on MCAs

• For my restaurant client, it was the only available option at the time.
  
  

• As a broker, I earned a commission from the MCA company, but I always disclosed the true costs to clients.
  
  

• Looking back, if I had been lending my own money at that point, I may have structured a private deal instead.
  
  

Key Lesson

Merchant Cash Advances are sometimes the only lifeline for certain businesses—but they are one of the most expensive financing tools on the market. Business owners should use them sparingly, and only when other options are off the table.

• Check out my books Invest Local https://a.co/d/4yZfosb and Credit Card Advantage https://a.co/d/b5JZoNx  for real-world strategies.
  
  

👉 Want deeper dives like this? Join my email list at DavidCBarnettList.com  for early access to videos, insights, and 7 free bonus gifts.

ARE YOU IN TROUBLE??? -Did you sign up for an expensive Merchant Cash Advance for your business and now struggle to make the payments? Find out how you can negotiate your way out at https://www.EndMyMCA.com

Customer Concentration Risk: The Hidden Danger Most Small Businesses Ignore

 Customer Concentration Risk: How It Affects Business Value and Financing

What happens to a business when one customer accounts for 20%, 30%, or even 50% of its revenue?

For business owners, having a major customer can feel like a competitive advantage. A large, dependable account provides revenue, supports employees, and can make the business appear financially successful.

But for someone considering buying that business, the same customer relationship can represent an enormous financial risk.

This is what we call customer concentration risk, and it's one of the most important issues I encourage buyers and sellers to understand.

I've worked on business acquisitions where customer concentration affected the purchase price, the amount a bank was willing to finance, and the structure of the entire transaction.

In some situations, it can even prevent a business from being sold.

Let's examine what customer concentration means, how it affects business valuation and acquisition financing, and what buyers and sellers can do to manage the risk.

What Is Customer Concentration Risk?

Customer concentration risk occurs when a significant percentage of a company's revenue comes from one customer or a small group of customers.

Imagine a business generating $2 million in annual revenue.

If one customer accounts for $800,000 of that revenue, the company has a 40% customer concentration.

That means losing a single account could eliminate almost half its sales.

Customer concentration is particularly common in business-to-business companies.

Manufacturers, transportation companies, wholesalers, contractors, and specialized service providers may depend on a relatively small number of major customers.

Consumer-facing businesses, such as restaurants and retail stores, often have more diversified customer bases.

But that doesn't mean all B2C businesses are automatically protected from concentration risk.

The important question is how much of the company's financial performance depends on a small number of relationships.

How Much Customer Concentration Is Too Much?

There's no single percentage that automatically makes a business unsuitable for acquisition.

However, I become concerned when one customer represents approximately 20% to 25% of revenue.

And when a single customer accounts for 50% of sales, the potential consequences of losing that account become extremely serious.

Why a 20% Customer Can Threaten the Entire Business

Suppose a company generates $1 million in annual revenue.

Its profit margin is 15%, giving it $150,000 in annual profit.

Now imagine one customer represents 25% of its sales.

If that customer leaves, the company loses $250,000 in revenue.

Some direct expenses may disappear, but many operating costs won't decline immediately.

Rent, management salaries, insurance, and other fixed overhead expenses may remain.

Depending on the contribution margin of the lost account and how quickly costs can be reduced, the business could lose most or all of its profitability.

And if the new owner borrowed money to acquire the company, they still have loan payments to make.

This is why buyers and lenders pay such close attention to customer concentration.

Look at Your Top Five Customers, Not Just the Largest One

When I'm helping someone evaluate a business, I encourage them to ask a question early in the process:

What percentage of revenue do your top five customers represent?

I think that's a better starting point than simply asking about the largest customer.

Suppose your biggest customer represents 11% of revenue.

That might not seem especially alarming.

But what if your next four largest customers each represent approximately 9% to 10%?

Now your top five customers account for close to half your revenue.

Losing two or three of those accounts could create serious financial difficulties.

That's why concentration should be evaluated across the entire customer base rather than focusing on a single number.

Why Customer Concentration Reduces Business Valuation

When buyers evaluate a business, they're trying to determine how much future cash flow they can reasonably expect to receive.

Customer concentration makes that prediction more uncertain.

A company with hundreds of independent customers may be better positioned to absorb the loss of a few accounts.

A company that depends on three major customers may experience a significant financial shock if just one relationship ends.

As a result, buyers may demand a lower purchase price or a greater margin of safety.

Why Buyers and Sellers See the Risk Differently

This can create tension during negotiations.

The seller may have worked with a major customer for 20 years.

They know the people involved, understand the relationship, and believe the customer has no reason to leave.

From their perspective, the revenue feels secure.

But the buyer doesn't have that same experience.

They don't know whether the customer will respond positively to new ownership.

They may also have substantial acquisition debt that the seller never had to manage.

A risk that the seller could survive might financially overwhelm the buyer.

This difference in perspective helps explain why customer concentration can lead to lower valuations or more complicated deal structures.

Do Long-Term Customer Contracts Eliminate Concentration Risk?

One of the most common arguments I hear from sellers is that their major customers are protected by long-term contracts.

Perhaps the customer has signed a three-year or five-year agreement.

Surely that makes the revenue safe?

Not necessarily.

Contracts can provide valuable protections, but they don't guarantee that the customer will continue generating the expected revenue.

A customer might experience financial difficulties, reduce its operations, dispute performance, or even go out of business.

A contract can't guarantee the customer's continued economic viability.

Why Shorter Contracts Can Sometimes Create Stronger Relationships

I've worked with a client in the waste collection business who takes an interesting approach to customer agreements.

Many competing waste collection companies use annual contracts.

When those agreements approach renewal, customers are reminded that they have an opportunity to shop around.

That can create a predictable cycle of competitive bidding.

My client's company uses short, month-to-month arrangements instead.

Customers know they can leave without waiting for an annual renewal date.

And that flexibility has value.

Some customers are willing to pay more because they appreciate not being locked into a long-term agreement.

The result is that customers don't necessarily feel the same urgency to review competing offers.

This doesn't mean month-to-month contracts are always better.

But it demonstrates why the strength of a customer relationship can't be measured solely by the length of its contract.

Buyers need to understand why customers stay, how easily they can leave, and what could cause the relationship to end.

The Hidden Risk of Industry Concentration

There's another form of concentration that buyers sometimes overlook.

Imagine a trucking company with 25 different customers.

At first glance, that sounds like a reasonably diversified customer base.

But suppose every customer operates in the lumber industry.

The trucking company may serve 25 businesses, yet all of them depend on demand for lumber.

If residential construction slows, several customers could reduce their shipping volumes simultaneously.

The trucking company's customer count hasn't changed.

But its revenue could decline significantly.

This is what I think of as an underlying industry concentration risk.

Why Customer Diversification Isn't Always Enough

When reviewing a company's customer list, I want to understand more than the percentage of revenue each customer represents.

I also want to know which industries those customers serve.

Are they exposed to the same economic conditions?

Do they depend on the same commodity?

Could a regulatory change affect several customers at once?

Are they concentrated in one geographic market?

A business can appear diversified by customer count while remaining heavily exposed to a single economic sector.

That's why understanding the customer's business can be just as important as understanding the customer relationship itself.

How Customer Concentration Affects Business Acquisition Financing

Banks and other lenders are particularly concerned about customer concentration because they need confidence that the acquired business will generate enough cash flow to repay its loans.

If a major customer disappears, the business may no longer be able to meet its debt obligations.

That can result in reduced financing, additional lender requirements, or outright loan denial.

The specific requirements vary by lender and financing program.

A Real Example: Financing a Business With 40% Customer Concentration

I once worked with a buyer evaluating a glass company in the Boston area.

The business supplied products to homebuilders.

One customer accounted for approximately 40% of its revenue.

Naturally, that created a major concern for the lender.

Rather than assuming the large customer would remain indefinitely, we approached the financing analysis differently.

We asked a simple question:

What would this business look like if that customer disappeared?

We examined how revenue would change.

Then we considered which costs would disappear along with that revenue.

The business would need fewer employees, less transportation, and lower direct operating expenses.

After making those adjustments, we concluded that the smaller business could still be profitable.

We then estimated what that reduced operation would be worth.

The lender was willing to provide financing based on the value of the business without the major customer.

As I explained in the original discussion:

“We'll lend you based on the diversified business, but we will not lend to you based on this one big customer.” —David C. Barnett

That approach allowed the transaction to proceed.

But the financing amount was substantially lower than it would have been if the bank had accepted the entire customer base without adjustment.

So how did we bridge the gap?

The seller financed the remaining portion of the purchase price.

How Seller Financing Can Reduce Customer Concentration Risk

Seller financing is one of the tools buyers can use when a business depends heavily on major customers.

Instead of paying the entire purchase price at closing, the buyer agrees to pay a portion over time.

This allows the seller to participate in some of the risk associated with the business's future performance.

In transactions with substantial customer concentration, I've seen buyers request seller financing representing 40%, 50%, or even 60% of the deal.

Those aren't universal market standards.

They're examples of the structures I've encountered when the risk was particularly significant.

Using Earn-Outs and Customer-Linked Seller Notes

An earn-out makes part of the purchase price dependent on future performance.

For example, suppose a business has one customer representing 25% of revenue.

The buyer might negotiate a seller note linked to the revenue generated by that customer.

If the customer continues purchasing at the expected level, the seller receives the agreed payments.

If the customer's business declines or disappears, the payments may be reduced according to the agreement.

That gives the buyer some protection against losing a major account shortly after closing.

Other possible arrangements include holdbacks, royalties, or contractual offsets tied to specified customer relationships.

These arrangements require careful legal and financial structuring.

Why Sellers Often Resist These Arrangements

I understand why sellers dislike this approach.

They've spent years building relationships with their customers.

They've taken the risks, delivered the products or services, and created the profitability the buyer wants to acquire.

From their perspective, they deserve to be paid for what they've built.

And they may reasonably ask why they should suffer financially if the buyer mismanages the business after closing.

That's a legitimate concern.

But buyers also need protection against risks they can't fully evaluate before taking ownership.

The solution often involves negotiating a deal structure that both parties can accept.

And for the seller, it makes choosing the right buyer especially important.

How to Reduce Customer Concentration Before Selling Your Business

If you own a business with significant customer concentration, I encourage you to start addressing the problem years before you intend to sell.

There are two strategies I consider particularly important.

Strategy 1: Diversify Your Customer Base

The most straightforward solution is to develop additional customer relationships.

You don't necessarily need to replace your largest customer.

Instead, you can reduce that customer's percentage of total revenue by growing other accounts.

For example, imagine your largest customer generates $500,000 of your company's $1 million in annual revenue.

That's 50% customer concentration.

If you develop enough new business to increase total revenue to $2 million while maintaining the original customer's sales, the concentration falls to 25%.

The relationship remains important, but the company is less dependent on it.

This strategy can take years.

That's why I recommend starting well before you're ready to exit.

Strategy 2: Develop an Internal Successor

The second strategy is to prepare someone who understands the business as well as you do.

This might involve hiring a manager who could eventually purchase the company.

Over time, that person can learn the operation, understand the financial performance, and build relationships with major customers.

By the time they're ready to acquire the business, they may have much greater confidence in those relationships than an outside buyer would.

That familiarity could reduce the perceived risk and make the transaction easier to structure.

But it requires a long-term succession plan.

You can't necessarily hire someone today and expect them to be ready to purchase your business next month.

Customer Concentration Due Diligence: What Buyers Should Investigate

If you're considering purchasing a business with significant customer concentration, I would make customer relationships a major focus of due diligence.

You need to understand the economic reasons those customers continue buying from the company.

And you need to determine whether those reasons will remain valid after the ownership transition.

Meet the Major Customers

If three or four customers account for a large portion of the company's revenue, I would want to meet them before completing the acquisition.

Naturally, sellers may be uncomfortable introducing prospective buyers to important customers.

Confidentiality needs to be handled carefully.

But the buyer needs reasonable confidence that those relationships can continue.

Understand Customer Switching Costs

Switching costs are the costs or difficulties a customer faces when changing suppliers.

Consider a trucking company.

If it simply transports goods from one location to another, the customer may be able to hire a different trucking company relatively easily.

Now consider a supplier of specialized manufacturing equipment.

The customer may have invested millions of dollars in machinery that requires proprietary parts, servicing, and technical support.

Changing suppliers could be considerably more difficult.

That creates higher switching costs.

And higher switching costs can make customer relationships more durable.

But they don't eliminate risk entirely.

Understand How Important Your Product Is to the Customer's Costs

I also want buyers to understand how much their product or service contributes to the customer's overall cost structure.

If you're supplying something that represents 50% of your customer's production costs, they're probably monitoring your prices very closely.

They have a strong incentive to negotiate lower prices or investigate alternatives.

But if your product represents only 1% of their total costs, they may be less motivated to replace you.

This doesn't guarantee customer retention.

However, it can help explain why some customer relationships are more stable than others.

What If a Business Has Only One Customer?

Here's an interesting question.

What if a company has 100% customer concentration?

In other words, what if it serves only one customer?

I think that's worth examining very carefully.

Economically, the company may function more like an outsourced department of its customer than a diversified independent business.

The customer has chosen to outsource a particular activity rather than perform it internally.

And that arrangement often exists because the customer believes outsourcing offers some economic advantage.

The Risk of Buying a Single-Customer Business

I've discussed this issue when evaluating FedEx delivery route businesses.

People sometimes look at these operations and assume they're buying a stable business with an established customer.

But the underlying economics deserve careful examination.

If the operation depends on one contracting company, changes in that company's policies, volumes, pricing, or service requirements can have a major impact.

You also need to understand whether the customer has the ability to reduce the amount of work it provides.

As I explained:

“You're buying a business from someone with only one customer.” —David C. Barnett

That doesn't automatically make every single-customer operation a bad acquisition.

But it creates a level of dependency that buyers should never ignore.

How to Protect Your Business After the Acquisition

If you decide to acquire a company with significant customer concentration, your work doesn't end at closing.

In fact, maintaining those relationships should become one of your highest priorities.

You need to understand the people involved, what they value, and why they continue doing business with the company.

Make sure the seller helps introduce you properly.

Learn the customer's expectations.

Understand the history of the relationship.

And identify any issues that could cause dissatisfaction after the transition.

I would also continue developing additional customers to reduce the concentration over time.

The objective is to preserve existing revenue while building a more resilient business.

The Bottom Line: Customer Concentration Can Make or Break a Business Sale

Customer concentration risk affects far more than a company's revenue.

It can influence business valuation, acquisition financing, deal structure, and the likelihood of completing a successful transaction.

For buyers, the challenge is understanding whether the company's cash flow can survive the loss of a major customer.

For sellers, the challenge is demonstrating that customer relationships are sustainable and transferable.

Long-term contracts can help, but they aren't guarantees.

A diversified customer list can help, but industry concentration may still create exposure.

And seller financing or earn-outs can help bridge disagreements, but they introduce additional risks for both parties.

The best approach is to understand customer concentration early, evaluate its financial consequences, and develop a strategy before it becomes a deal-breaking problem.

If you're a business owner, start reducing concentration years before your planned exit.

If you're a buyer, investigate the relationships carefully and structure the transaction so that you're not taking on more risk than you can afford.

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