By Craig S. Cody, CPA, Certified Tax Coach.
Here's the answer up front. Most agency owners know their biggest client is big. Few know how big, because they measure it the easy way: one logo, one year, gross billings. A buyer measures it four other ways: on agency gross income, by relationship rather than logo, over three years, and by profit as well as revenue. Each of those usually makes the number bigger. So before anyone asks, measure it the buyer's way, and then decide what to do about it.
Over the years I've seen many an agency crippled because it had a whale client, one worth more than 35% of agency gross income, and lost it. A buyer has seen the same thing. That's why their question is always the same, however long the client has been with you: what happens if that client leaves?
Because they're paying today for profit that has to show up after you sign.
A buyer prices your agency as a multiple of profit. If one client produces a big share of that profit and leaves in year one, the buyer paid a multiple for money that walked out the door. That's why concentration is one of the first numbers they ask for, and why they ask it the hard way.
Public companies have to face this one in writing. Under the accounting rule for major customers, a public company discloses any single customer that brings in 10% or more of its revenue (Deloitte's guide to ASC 280-10-50-42). Your agency doesn't file that disclosure. Your buyer will build it for you anyway.
Start from agency gross income (AGI), your revenue after pass-through costs like media and production. A client who runs a lot of media through you looks smaller as a share of billings than it really is. Say your top client is $3 million of $8 million in billings, but most of that is media. On AGI it might be $900,000 of $2 million. That's 45%, not 38%.
A buyer will rebuild the number on AGI, so you should too. It has to be the same AGI on your P&L and your tax return, which is its own question: whether your P&L and your tax return tell the same story.
Two brands owned by the same parent company are, to a buyer, often one client. So are three divisions that answer to one chief marketing officer, or a client whose new company you followed when your contact changed jobs. If one decision could end all of them at once, count them together.
The accounting rule above works the same way. Companies under common control count as a single customer, and so does a government with its agencies. A buyer reading your client list will group it that way before they do anything else.
One year can flatter you or scare you. A client that had a huge launch last year may look like 40% of AGI and be 20% in a normal year. Another one may have grown quietly from 15% to 30% over three years without anyone noticing.
Put three years side by side. The trend is often more important to a buyer than the level. A rising share says the agency is becoming more dependent on one client every year.
Your biggest client by AGI isn't always your biggest client by profit. Sometimes it's the most profitable account in the agency, so its share of profit is even higher than its share of AGI. Sometimes it's a demanding client at a thin margin, and its share of profit is lower.
A buyer wants both numbers, because they're buying profit. If you don't have margin by client yet, gross margin by account manager is a good place to start.
Usually, yes. Ask how many humans at that client would have to leave before the relationship was in danger. If the answer is one, the account is single-threaded, and that's a second risk sitting inside the first.
Marketing contacts change jobs all the time. A new CMO often brings their own agency. So the buyer's follow-up questions will be about breadth: how many people at the client know your team, whether your team works with more than one department, and how the relationship survived the last change of contact, if there was one.
If the client's first call goes to you personally, that's a different problem, owner dependence, and the self-audit on whether you own an agency or a job is where to work on it.
More than most owners guess. The math is simple, and it's worth doing once.
Say your agency does $2 million of AGI and your top client is $800,000 of it. That's 40%. If the client stays the same size, here's how much total AGI you'd need for it to fall to a lower share:
| Target share | Total AGI needed | New AGI from other clients |
|---|---|---|
| 35% | $2,285,714 | $285,714 |
| 30% | $2,666,667 | $666,667 |
| 25% | $3,200,000 | $1,200,000 |
Getting from 40% to 25% means adding $1.2 million of AGI from everybody else, doubling everything else the agency does. That doesn't happen in the year before a sale. It happens over several years, which is why concentration belongs on the long list, two or three years out, rather than in the twelve months before a sale.
There's a catch for agencies working hard on account growth, too. Growing existing clients is often the most profitable growth you can find, and I've written about how to do it. But selling your biggest client a fourth service pushes its share up, not down. If one client is already a big share, aim the account growth at the next five.
It depends on whether it's a great client or just a big one.
If it's a great client, a good fit at a good margin, keep it. Shrinking a great client to fix a ratio trades real profit for a better-looking percentage, and a buyer is paying for the profit. Work on both sides of the risk instead. Grow everything else, as the table shows. And make the big relationship more durable: a longer term, renewal language that doesn't need a new signature every year, a longer notice period, and more humans connected on both sides. The contract side of that is covered in sorting your revenue into three buckets.
If it's big but not a good fit, take a harder look. I've been there myself. About ten years ago, one client was worth about 25% of my firm's billings, and they weren't the best fit for us. When we let them go, the stress reduction was tremendous.
And I'm not the only one. I haven't seen a client or a colleague of ours voluntarily remove their largest client and not come back significantly stronger financially. That's what I've watched happen, not a promise, and it only works if you plan the cash for the gap first. But it tells you the fear of losing a whale is often bigger than the whale.
It usually changes the terms more than it kills the deal. A buyer may lower the price, hold some of it back, or tie part of what they pay to whether the big client is still there after closing. How your weakest area turns into deal terms is covered in the four-point self-audit.
The owner who walks in with the numbers already done is in a better spot either way. "Our top client is 38% of AGI, down from 44% three years ago, on a two-year agreement with six contacts across three departments" is a very different conversation from "they've been with us forever."
If no single client is more than about 10% of your AGI, and your top three together are under 25%, concentration probably isn't your biggest issue. Spend the time on something else.
And if you're years from any sale, you're not on a deadline. The math still matters, though. An agency where one client is 40% of AGI has a cash problem waiting to happen whether it's ever sold or not.
Pull the last three years of revenue by client. Subtract pass-through media and production to get each client's AGI. Group any clients that one decision could end together. Then put it on one page:
If you can't build that page in an afternoon, that's the first thing to fix. A buyer will want it on the first call.
Client concentration is how much of an agency's income depends on a small number of clients. Buyers usually look at the largest client's share and the top three clients' combined share of agency gross income, because losing one big client after the sale could take a large part of the profit they paid for.
There's no single rule, but a buyer will ask questions about any client that's a big share of the agency. A client worth more than 35% of agency gross income is a whale, and losing one can cripple an agency. Below about 10% for the largest client and 25% for the top three combined, concentration usually isn't the biggest issue.
On agency gross income, revenue after pass-through costs like media and production. Media-heavy clients look smaller as a share of billings than they really are, and buyers rebuild the number on AGI.
Often, yes. If one decision could end both relationships, a buyer will usually count them together. The public company accounting rule for major customers treats companies under common control as a single customer for the same reason.
If the big client is a good fit, grow the rest of the agency rather than shrinking it, and make the relationship more durable with a longer term, stronger renewal and notice language, and more contacts on both sides. If it's a poor fit, letting it go after planning the cash for the gap is worth a hard look. Because the growth math takes years to move, start two to three years before a sale.
Your biggest client is a strength right up until someone asks what happens if they leave. Know the answer before a buyer asks, measured their way, and you're the one setting the terms of that conversation.
If you'd like help building that one page from your own numbers, book a Free Tax Analysis. It starts with a short 15-minute call, so nothing sensitive changes hands before we've talked. Email me at craig@ccodycpa.com to schedule it, or request one with the form on this page.
Craig S. Cody is a CPA, Certified Tax Coach, and retired NYPD Lieutenant. His firm works with more than 70 marketing and advertising agency owners every month, helping them keep more of what they make through proactive tax planning.
This article is general education, not advice for your specific situation. Confirm your own facts with your advisor before acting.