Take Five #210: High customer concentration risks and solutions, and more
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Take Five #210: High customer concentration risks and solutions, and more
1. Deal-by-deal capital may offer ETA buyers a practical alternative to traditional search funds
Independent sponsors have grown from a niche corner of private equity to a mainstream LMM acquisition channel over the past 15 years. In 2010, independent sponsors represented less than 5% of LMM deal volume; in 2026, they represent roughly 20-25% of LMM acquisitions. The growth reflects two structural shifts: (1) Increased LP appetite for deal-by-deal selection (avoiding the committed-capital pressure that drives traditional PE deployment pace), and (2) Increased availability of capital-light sponsors with operational expertise but without fund-raising track records to support traditional fund formation.
This guide is the working playbook for independent sponsor economics. We’ll walk through the structural difference vs traditional PE (committed capital vs deal-by-deal), the standard 2026 fee structure (2-5% transaction fee + 20-25% promote on returns above 8% pref), LP investor return waterfall, alignment dynamics between sponsor and LPs, the trade-offs for sellers (slower close but more selective buyer), and the named active sponsors in the 2026 LMM market (Argonaut Private Equity, Mainsail Partners, Trilantic Capital Partners, Aterian Investment Partners, Anacapa Partners, Renovus Capital Partners, Plexus Capital). The goal: a buyer evaluating the independent sponsor model can make an informed decision about whether it fits their situation. For a deeper look, see our guide on selling to an independent sponsor what most owners dont expect.
The framework comes from working alongside 76+ active U.S. lower middle-market buyers including independent sponsors raising deal-by-deal capital, family offices investing as LPs in independent sponsor deals, and PE platforms competing with independent sponsors for deal flow. We’re a buy-side partner. The buyers pay us when a deal closes — not the seller. The patterns below come from observed independent sponsor structures across LMM acquisitions in the $5M-$200M EV range. Independent sponsors don’t disclose detailed economics publicly; this framework draws on direct conversations and observed deal documents.
One framing note before we start. Independent sponsors are not a homogeneous category — they range from solo operators with one closed deal to seasoned multi-deal sponsors with $500M+ of cumulative capital deployed across 10-20 deals. Economics, capabilities, and LP networks vary widely. The economics framework below describes the median 2026 LMM independent sponsor; specific sponsors will be above or below median depending on track record, sector specialization, and LP relationships.
Read CT Acquisition’s article here.
2. Nothing tests ETA ambitions like having to explain missed paychecks to service technicians
3. “High Customer Concentration: Risks and Solutions”
Understanding the risks tied to high customer concentration is a vital part of due diligence when acquiring small or medium-sized businesses. A heavy reliance on a few clients for the bulk of revenue introduces three major challenges that can derail a deal or jeopardize the long-term health of the business. Let’s break these risks down further.
Revenue Volatility and Financial Instability
Losing a key customer can wreak havoc on cash flow. Consider a Midwest CPA firm where the seller initially claimed their largest client made up 20% of revenue. However, during the Quality of Earnings (QoE) review, investigators uncovered inter-company transactions that inflated the numbers. After adjusting for these, a single external customer actually accounted for over 60% of the company’s revenue, prompting the buyer to walk away from the deal.
Another case from August 2024 involved a business generating $1.4 million in revenue with a 40% EBITDA margin ($550,000). Despite these seemingly strong metrics, the business depended on just two customers, both of whom could terminate their contracts with only 30 days’ notice. This risk made traditional bank financing nearly impossible, and experts recommended structuring the deal around earn-outs or vendor take-back notes tied to customer retention.
“I would be weighting consideration heavily to earn-out or VTB tied to customer retention.” - Dustin Owen, Managing Director, Longview Growth Partners
The sudden loss of a major client often forces businesses to lay off staff or scramble to pivot their business model. Since accounts receivable - frequently uninsured - can make up 40% of a business’s assets, a departing client can trigger a cash flow crisis that’s tough to bounce back from.
Customer Leverage and Margin Erosion
When a business relies heavily on a few large clients, those customers gain leverage, which can erode profitability. Big clients know their importance and often demand steep discounts or extended payment terms of 90 to 120 days. This puts pressure on working capital and squeezes margins.
“Large customers are often less profitable than smaller ones, in part due to the negotiating leverage that they often attempt to exercise over their vendors.” - Mineola Search Partners
Additionally, serving a “whale” client often requires significant investments in staffing, equipment, or custom solutions. These fixed costs can become a burden if the relationship ends, leaving the business with unused resources that weigh down profitability.
4. Regulatory changes could be reshaping SBA 7(a) market share faster than credit conditions
5. Acquiring Minds Interview: “Too Good to Be True: Year 1 in a $700k SDE Business”
The approach of today’s guest has a different flavor than you’re used to hearing on Acquiring Minds.
You could say that Zack Mutnik does not analyze things to death.
He prefers action to analysis, and when he does decide on a course of action, he moves with conviction.
So it was with the business he decided to acquire, an electrical contracting business in southwest Florida.
There were definitely a few flags as Zack negotiated with the seller and tried to learn about the business.
But at some point, his intuition told him that this opportunity was the one to seize.
“I made the decision in my head, this is happening, so we’re gonna move, we’re gonna quit our jobs. This is happening.”
Now you can achieve a lot with that attitude, that momentum — but it doesn’t come free.
Once Zack bought the business, the numbers didn’t quite add up.
Turnover was constant. Of the 10 original employees, one year later just two remain.
There were two ongoing lawsuits. (And yes, it was a stock sale.)
Find the Acquiring Minds episode here.
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