Client Concentration Risk When Buying a Marketing Agency
An agency can have talented people, strong results and a good reputation and still carry a hidden vulnerability: too much of its revenue comes from too few clients. If one large account leaves after the sale, the business a buyer paid for may look very different within a short time. Marketing agency client concentration is one of the first things buyers and lenders examine, and it can shape price, structure and financing.
This article is general information for buyers and sellers of existing, operating digital marketing agencies. It does not provide concentration thresholds or benchmarks, and lender policies vary. Client contract terms should be reviewed with qualified attorneys. Nothing here is legal or financial advice.
Forms of Concentration
- Single-client concentration: one client represents a large share of revenue or profit
- Industry concentration: many clients in one sector that may face the same downturn or regulatory change
- Referral concentration: new clients come mainly from one partner, another agency or a single source
- White-label concentration: the agency does much of its work for another agency that resells it, so one relationship controls a large part of revenue
- Relationship concentration: several large clients managed by the same person
Why Concentration Matters to Buyers
Buyers value an agency on earnings they expect to continue. When a large client represents a meaningful part of profit, the loss of that client could affect the buyer’s ability to pay salaries, debt service and seller notes at the same time. Buyers should consider how the agency would look without its largest account. Our guide to digital marketing agency valuation explains how concentration may affect price.
How Lenders View Concentration
Lenders typically review revenue by client and may ask how the business would perform if a major client left. They may want to see contract terms for large clients, the length of those relationships and who manages them. Significant concentration does not necessarily prevent financing, but it can affect how much a lender is comfortable lending and what structure it requires. Our article on marketing agency loan requirements covers the documentation frequently requested.
Evaluating a Large Client
- How long the client has worked with the agency and how the scope has changed
- Contract term, notice provisions and assignment or consent requirements
- Whether the client’s decision-maker has changed recently or may change
- Whether the relationship is with the founder, a key employee or a broader team
- The profitability of the account after delivery costs, not just its revenue
- Payment history and any receivables concerns
Our article on marketing agency client retainers explains how to read client agreements, and our guide to marketing agency key employees addresses relationship risk.
Ways Buyers May Address Concentration
- Meeting major clients before closing where the seller and counsel agree it is appropriate
- Asking the seller to remain involved through a transition period
- Tying part of the price to the retention of specific clients through an earnout or seller note
- Adjusting the price to reflect the risk
- Planning for working capital in case a large account leaves
Retention-based structures are discussed in our article on marketing agency seller financing. Some lenders and loan programs limit earnouts, so structure should be discussed with the lender early.
For Sellers
Owners planning a future sale may benefit from broadening their client base, spreading relationships across more than one team member and putting current written agreements in place. These steps take time, which is one reason to start preparing well before a sale.
US Professional Funding helps buyers finance the acquisition of existing, operating digital marketing agencies, including agencies with larger client relationships that need careful structuring. Learn more about our digital marketing agency acquisition financing.
