Buying a Company That Leaned on One Customer for 40%

The situation

Amalia, a professional engineer who had spent a decade running plant operations before moving into corporate development, had found what looked like a strong add-on acquisition for the manufacturing group she worked for. A precision parts supplier based in Stratford had built a solid reputation over eighteen years, and its numbers were good: steady revenue, healthy margins, a loyal workforce. Amalia's colleague Fernanda, the group's sales director, had sat in on the early meetings with the seller, Hanna, and came away confident the fit was right. The businesses served overlapping industrial customers, and combining them promised real efficiencies in purchasing and logistics.

The deal was structured as a share purchase in the roughly $30 million to $50 million range, with the buyer acquiring all of the shares of the target company rather than just its assets. The parties signed a letter of intent setting out price and key terms, and the buyer's team moved into due diligence — the period where the target's finances, contracts, and operations are examined in detail before a binding agreement is signed. Treadstone Law was retained to lead the legal side of that review and to draft the share purchase agreement.

What the review found

Financial due diligence is often where a deal's real risks surface, and this one surfaced quickly. When the target's customer list was broken down by revenue, one customer — a large industrial buyer that had been ordering from the Stratford supplier for over a decade — accounted for close to 40% of annual revenue. No other customer came close to that share; the next largest represented well under 10%.

This kind of concentration is common in mid-market manufacturing and distribution businesses, where a handful of long relationships can carry a company for years. It is not automatically a reason to walk away from a deal. But it changes what the business is actually worth, and it changes what the purchase agreement needs to do. A buyer paying a multiple of earnings is, in effect, paying for the expectation that this year's revenue repeats next year. If the key customer left — because of a merger on their end, a change in their purchasing strategy, or simply discomfort with new ownership — a large share of that revenue could disappear with them, and the price paid would no longer match what was actually being bought.

The review also found that the relationship with the key customer ran on a series of purchase orders and a general supply arrangement rather than a long-term contract with a fixed term. There was no formal agreement locking the customer in for a set number of years, and the existing arrangement contained a clause letting the customer end the relationship on notice. That meant the customer's loyalty rested on the relationship itself — and specifically on trust built with the outgoing owner, Hanna, who had run the company since it started and had a direct personal relationship with the customer's own purchasing team.

A second issue compounded the first: many supply contracts contain a change of control clause, which gives a customer the right to terminate, or to demand renegotiation, if the ownership of the supplier changes. The target's agreement with its key customer was reviewed line by line to check whether such a clause existed and, if so, exactly what triggered it and what notice or consent it required.

What we did

1. Confirmed whether the key contract required customer consent to close. The supply arrangement with the key customer did contain language addressing a change in ownership. Rather than leave that ambiguous, the deal was structured so that obtaining a written acknowledgment from the customer — confirming it intended to continue the relationship after the sale — became a condition that had to be satisfied before closing could occur.
2. Arranged a joint introduction before signing. With Hanna's cooperation, Amalia and Fernanda met the key customer's purchasing leadership together with Hanna, while the deal was still conditional. This let the buyer test the temperature of the relationship directly, rather than relying on the seller's assurances, and let the customer meet the people who would actually be running the account going forward.
3. Negotiated a revenue-linked earnout instead of paying full price at closing. An earnout is a mechanism where part of the purchase price is deferred and paid later, contingent on the business hitting agreed financial targets. Roughly a fifth of the total price was structured this way, tied to the target's revenue over the two years following closing. If the key customer's spending held up, Hanna received the full deferred amount; if it dropped sharply, the earnout scaled down with it. This aligned the seller's incentive to help retain the customer with the buyer's exposure if it left anyway.
4. Built in a purchase price holdback and stronger indemnities. Separately from the earnout, a portion of the price was held back in escrow for a set period after closing, available to compensate the buyer for losses tied to specific risks identified in due diligence, including a material drop in revenue from the key customer within the first year. The seller's representations and warranties — the seller's contractual promises about the state of the business — were drafted to specifically address the status of the key customer relationship, with Hanna confirming there were no known issues that would cause the customer to reduce or end its orders.
5. Added a closing condition tied to customer continuity. The purchase agreement made closing conditional on there being no material adverse change in the key customer relationship between signing and closing — meaning if the customer indicated an intention to leave or materially cut orders during that window, the buyer had the right to walk away or renegotiate before money changed hands, rather than discovering the problem only after taking ownership.

The outcome

The deal closed on schedule. The key customer signed the written acknowledgment confirming it intended to continue purchasing after the ownership change, and the joint meeting with Hanna went well — the customer's purchasing director had worked with several members of the target's team for years and was reassured to see continuity in staff even as ownership changed.

The protections built into the agreement mattered less in the end for what they prevented and more for what they made possible: Amalia and Fernanda's group was able to proceed with a deal they might otherwise have walked away from, or tried to price down aggressively in a way that could have killed the negotiation. By pricing part of the deal to the actual retention of the key customer through the earnout, and by backing the seller's promises with a holdback, the buyer paid full value if the business performed as represented — and had a clear, contractual path to recover value if it did not. In the first year after closing, the key customer's spending held roughly steady, and the earnout paid out close to its full amount at the end of the measurement period.

Fernanda's sales team also used the transition period productively, working alongside Hanna during a short handover to build direct relationships with the key customer's buyers rather than leaving that connection resting on one person. By the time the earnout period ended, the account was no longer dependent on any single relationship on either side.

What you can learn from this