The Challenge
A technology company had identified a Canadian tech business as an acquisition target. On paper the fit was strong: complementary products, a credible management team and a revenue line that had grown steadily. The buyer understood the market and the technology, and the commercial case had already been made internally.
What the buyer needed was an independent view of the numbers before committing. Specifically, whether the revenue they were paying for was as durable as the headline suggested.
Our Process
We ran financial due diligence on the target, with the revenue base as the central question.
Revenue by customer, not by product. The target reported revenue by product line, and that view looked diversified. Rebuilding it customer by customer told a different story: a handful of clients accounted for 63% of total revenue.
Testing the largest relationships. For each major customer we looked at contract terms, renewal timing, billing and collection history, and how dependent the relationship was on a single project or budget line. This is where concentration stops being a statistic and becomes a specific, named risk.
One customer in difficulty. One of those top customers was showing signs of strain. Its circumstances meant the relationship could not be treated as secure, and nothing in the target's forecast allowed for losing it.
Modelling the loss. We ran the scenario the forecast did not: the target without that customer. The effect was not marginal. A large portion of revenue disappeared with it, and because the cost base was largely fixed, the impact on profitability was sharper still. The price under discussion assumed a business that, in that scenario, would no longer exist in the same form.
Key Outcome
The buyer had approached the deal as a technology decision and was right about the technology. The risk sat in who was paying for it.
With the concentration quantified and the at-risk customer identified, the buyer concluded the exposure was too large to take on. It decided not to proceed.
Results
- ·63% of revenue traced to a handful of customers, identified before any commitment was made
- ·A specific at-risk customer flagged, with the revenue and profit impact of losing it modelled
- ·Buyer withdrew from a transaction that would have priced in revenue the business was at real risk of losing
- ·Capital and management time preserved for a better-fitting acquisition
Why this matters
Customer concentration is one of the most common findings in technology due diligence and one of the easiest to miss. Reported revenue is usually cut by product, region or contract type. The concentration only becomes visible when someone rebuilds it customer by customer and then asks what happens if the largest name leaves.
A buyer who walks away after diligence has not wasted the work. That is the work doing its job.
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