Too Heavy a Lift: Two Clients, Seventy Percent

This one got further than most.

A Florida luxury fitness and wellness consultancy. Twenty-plus years in business. Around $2.4M in revenue. SDE, or seller’s discretionary earnings, just under $500K. Ninety-two percent gross margins. Zero inventory. Zero FF&E. The owners were genuinely absentee, with a GM and an operations manager already running day-to-day. On paper, this was close to exactly the kind of deal I look for.

I requested the revenue breakdown. When it came back, the first number I saw told me most of what I needed to know.

Two gym management clients represented 70% of revenue. The remaining 30% was project work: new gym builds and equipment procurement.

I met the founder in person anyway. We walked one of the gyms together. I sat across from him and tried to structure a deal that could work.

I passed.

Why concentration at this level is different

Customer concentration is a risk in every deal. The question is always the same: what happens if that customer leaves? A 10% client is a setback. A 20% client is a serious problem. A client representing 35% of your revenue is a potential business-ending event.

This deal had two clients at 70%. Combined.

Read that again.

That means if either of those two clients decided to bring gym management in-house, hire a competitor, or simply not renew, the revenue impact would be immediate and severe. There are no contracts in a management consulting relationship that prevent that from happening. The relationship is as durable as the last conversation went well.

The 92% gross margin looks exceptional until you run the math on a 35% client departure. You do not lose 35% of revenue. You lose 35% of revenue at a 92% gross margin, which means you lose nearly all of the economics that made the deal attractive in the first place. The fixed cost base does not shrink with the client.

The other issues

Concentration was the headline but it was not the only flag.

• Asking price above range. The seller was asking roughly 5.35x stated SDE. My range is 3 to 5x. On an adjusted basis, reinstating owner compensation as a replacement cost, the multiple was closer to 6x on only two years of meaningful profitability. The business had been operating for over 20 years but showed a net loss as recently as 2023. The price did not reflect that history.
• Only two years of real profitability. A 20-year operating history with a net loss in 2023 raises a fundamental question a CIM cannot answer on its own. What changed? Was it a one-time cost event, a new client, a pricing shift? The explanation matters enormously when you are being asked to pay a premium multiple.
• Unexplained debt disappearance. The financials showed significant interest expense in 2023 and 2024, well over $100K combined, that completely disappeared in 2025. Whether that debt was paid off from operations, forgiven, or converted was never fully resolved. If any of it was related-party or could resurface post-close, the 2025 earnings number was overstated.
• The entire pipeline ran through the founder’s personal relationships. The GM ran the work. The founder brought the work in. No CRM, no marketing spend, no sales function. Those are two different jobs, and only the operational one transferred cleanly with the business.

The structure I tried

I met the founder because I thought the deal could work with the right structure. The management team was real. The brand had genuine credibility in a niche market. The gross margins were exceptional.

But I could not buy the concentration risk at full price. No buyer should.

I proposed a seller note with a forgiveness component tied to client retention in the first year post-close. The structure was straightforward: a portion of the seller’s proceeds would be held back and forgiven on a schedule, contingent on revenue retention from the two anchor clients. If they stayed, the seller got paid in full. If they walked, the forgiveness reduced proportionally.

The founder refused. He was confident the clients would stay regardless of ownership and was not willing to tie any portion of his payout to that outcome.

That answer told me everything I needed to know. If a seller is genuinely confident that 70% of his revenue is stable post-close, a retention-based structure is almost free money for him. The only reason to refuse it is if the confidence is not as solid as the conversation suggests. I did not say that across the table. But I walked.

What this means for sellers

High customer concentration is not a disqualifying flaw in every deal. Some concentrated businesses trade successfully when the relationships are contractually protected, when the clients have long renewal histories, or when the buyer has specific domain expertise that makes retention more likely. But concentration without contracts, in a consulting relationship, where the clients came in through the founder’s personal network, is a different risk profile entirely.

When clients hire me, this is one of the first things we map. Not just who the top clients are, but how durable those relationships are without the current owner in the picture. The answer shapes everything from the asking price to the deal structure to who the right buyer actually is.

A business with 70% of its revenue in two relationships needs either a price that reflects that risk, a structure that protects the buyer if those relationships do not transfer, or a seller who is willing to prove through the deal terms that the confidence they are expressing is real. This deal had none of the three.

If you didn’t know, now you know.

* Every deal I look at is under NDA. The story below is real. Some identifying details — company name, specific geography, exact numbers — may have been changed to protect the seller. The lessons haven’t.