Customer concentration is the silent killer of valuation in M&A diligence. A business with $5M ARR where 40% comes from one customer is a single phone call away from disaster — and acquirers price that risk into the deal as a 20-40% valuation haircut. This calculator computes Top-1/5/10/20 concentration, Herfindahl-Hirschman Index (HHI), SEC Reg S-K Item 101(c) 10% disclosure flags, and valuation haircut estimates from Pepperdine PCMI and GF Data 2024 composite benchmarks.
HHI (Herfindahl-Hirschman Index) is the canonical concentration measure used in DOJ/FTC merger guidelines. Compute as sum of squared market shares (×10,000 for percentages). DOJ thresholds: HHI <1,500 = unconcentrated, 1,500-2,500 = moderately concentrated, >2,500 = highly concentrated. For customer concentration in a private business, HHI >2,500 typically triggers significant valuation haircuts in M&A. The "effective number of customers" (10,000 ÷ HHI) gives an intuitive measure of how diversified your revenue base actually is.
SEC Regulation S-K Item 101(c) requires public companies to disclose customers representing >10% of consolidated revenue. The calculator flags any customer above this threshold so you can see what would need disclosing in an S-1 or 10-K. Even for private companies, the 10% threshold is a useful "should we be worried?" line — most acquirers consider any single customer above 10% a material concentration risk warranting deeper diligence.
Sum of squared revenue shares per customer (as percentages). E.g., three customers at 50/30/20% = 50² + 30² + 20² = 2,500 + 900 + 400 = 3,800 HHI. DOJ thresholds: <1,500 unconcentrated, 1,500-2,500 moderately, >2,500 highly. The calculator computes it automatically from a paste-list of customer revenues.
SEC Reg S-K Item 101(c) requires public companies to disclose customers representing >10% of consolidated revenue. The calculator flags any customer above this threshold. For private companies pursuing an exit, acquirers typically use 10% as the "should we worry?" line — single-customer dependency above 10% is a material risk requiring deeper diligence.
Pepperdine PCMI and GF Data 2024 benchmarks: 10-20% top-customer concentration = ~5-10% valuation haircut. 20-30% = 10-20% haircut. >30% = 20-40% haircut. >50% = often unsellable or sold at distressed pricing. The calculator estimates haircut based on your specific concentration profile.
It's 10,000 / HHI — gives you an intuitive measure of how diversified your revenue actually is. A business with 100 customers but heavy concentration on 5 might have an effective number of just 8-12 customers, which tells you the "100 customers" headline is misleading. Useful for board reporting and investor narratives.
Three paths: (1) Cap large customer share — refuse to take on new business from existing top customer past a threshold; (2) Add segment/vertical diversification — actively pursue accounts in different industries; (3) Geographic diversification — accounts in different regions reduce single-market risk. Most effective is #2 because it reduces correlated risk (one industry downturn affects your concentrated bucket).
Sources: DOJ/FTC 2023 Merger Guidelines · SEC Reg S-K Item 101(c) · Pepperdine PCMI · GF Data Resources 2024