CommercialValuation
The 25% Cliff
Also known as: Customer concentration threshold, concentration cliff
The threshold above which a single customer's share of revenue triggers a discrete risk category in the buyer's model. Below 25%, concentration is a customer. Above it, it's a structural risk.
WHY IT MATTERS
Buyers use rules of thumb, and one of the most consistent is the 25% line. When any single customer accounts for more than 25% of revenue, the buyer's commercial team stops treating it as a customer relationship and starts treating it as a change-of-control event waiting to happen. Three things drive the cliff. First, the relationship lives in a person, not a contract — when the founder sells, the relationship is exposed. Second, change of control gives the customer political cover to renegotiate or rebid. Third, concentration risk is asymmetric: the upside is bounded by what the customer is already buying, while the downside is unbounded. The buyer prices the downside. The 25% Cliff is one of the most preventable items on the deduction list, but also one of the slowest to fix — shrinking concentration by growing everything else takes 18 to 36 months of disciplined business development. The other lever is documentation: converting a handshake renewal into a written agreement with multi-level relationships and a clean transition plan changes the deductibility without changing the revenue dollars.