What Is Client Concentration? | Agency M&A Definition
Client concentration measures how dependent an agency’s revenue is on a small number of clients. It is typically expressed as the percentage of total revenue generated by the top one, three, or five clients. High client concentration is one of the most common deal-breakers in agency M&A because losing a single major account could devastate the business.
Client Concentration in Agency M&A
Buyers evaluating a marketing agency will immediately examine the client revenue breakdown. The general rule is that no single client should account for more than 15-20% of total revenue, and the top five clients combined should represent less than 50%. When selling a digital marketing agency with $2M in revenue where one client generates $600K (30%), expect significant pushback from buyers — or a structured deal with earnout provisions tied to that client’s retention. The risk is straightforward: if that client leaves after the sale, the buyer has overpaid. Client concentration becomes especially problematic when the relationship is tied to the founder’s personal network rather than a formal contract. During due diligence, buyers will examine contract terms, renewal history, and the depth of relationships across multiple contacts at each major account. Agencies with diversified client bases across industries and contract types present a far more attractive acquisition target than those dependent on a handful of large accounts.
How Client Concentration Affects Agency Valuation
Client concentration is one of the fastest ways to reduce — or increase — an agency’s valuation multiple. An agency with no client representing more than 10% of revenue might trade at 6-7x EBITDA, while an otherwise identical agency with 35% concentration in a single client might see its multiple drop to 4-5x. Some buyers apply a direct discount: for every percentage point above 20% that a single client represents, they reduce the offer by 0.5-1%. Others mitigate the risk through deal structure, placing 15-25% of the purchase price in escrow or earnout provisions contingent on retaining the concentrated client for 12-24 months post-closing.
Example
A branding agency generates $2.4M in annual revenue. Its largest client contributes $720K (30%), and the top three clients account for $1.32M (55%). A buyer initially values the agency at 6x EBITDA ($480K EBITDA = $2.88M). Due to client concentration risk, the buyer restructures: $2.1M at closing with $780K held as a two-year earnout contingent on retaining the top client. If the top client churns within year one, the seller forfeits $780K — effectively reducing the sale price to $2.1M, or roughly 4.4x EBITDA.
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