Contrary to popular belief, when you find the right business for you, it may not be a “perfect” one on the surface.

It’s actually pretty common to find a business you really like – or even love – that has one big risk that could throw the whole deal off balance. It could be something the broker can’t even explain. You might not be sure how to categorize the challenge, how to approach it, or how to decide if it’s even worth moving forward.

Because I’ve seen this scenario play out more times than I haven’t, I developed a straightforward method to deal with it. It’s what I call the Weighted Average Valuation (WAV) technique. I’ve used it personally and as a broker for decades to address risks like this to ultimately strike fair deals and keep transactions moving.

For those of you who don’t know me, I’m Walker Deibel, Wall Street Journal bestselling author of Buy Then Build and creator of the Acquisition Lab. Over the last 20 years, I’ve acquired more than 10 companies and been involved in over 100 deals.

Today, I want to share how I handle these situations so you can confidently do the same.

Because the thing is: when you’re buying a business, risks are inevitable. The key is knowing how to separate them, quantify them, and work them into the deal. In this article, I’ll walk you through the process I use, step by step, to take risks that feel overwhelming and turn them into manageable parts of the valuation.

Let’s start with an example.

 

How to Value Two Businesses Under One

One time, I was working with a potential seller, helping them prepare their business to go to market.

Their business was generating just over $2 million in earnings, and they expected to sell at a multiple in the range of four to five times. On the surface, I didn’t think their expectation was unreasonable – everything looked great.

 

 

But as I dug in, I noticed a problem.

About $650,000 of those earnings (over 30%) came from a separate product under the same LLC. It wasn’t just another product line – it was fundamentally different. The value proposition didn’t align with the core business, and it served a completely separate customer base.

To make matters worse, those $650,000 in earnings were tied to a single customer. What we were really looking at wasn’t one business, but two.

Here’s how it broke down: the main business was generating about $1.4 million in earnings, and then there was this additional product line, which accounted for $650,000. It even had its own customer service team. Initially, the seller thought their $2 million in earnings justified a four to five times multiple, but that number didn’t hold up under scrutiny.

I explained to the seller, “Here’s the deal. The main business, generating $1.4 million, will likely sell for a multiple between four and 4.8 times earnings, including working capital. But this other piece? With only one customer and a different value proposition, it’s a much riskier proposition. It’s probably worth somewhere between one and two times earnings, depending on the terms – whether it’s cash at close, deferred payments, or something else.”

Once I broke it down this way, they began to see the picture more clearly.

These were two different businesses that needed to be valued separately. Upon my recommendation, they ultimately decided to split them into separate LLCs, making it easier to sell each one on its own in the future – this move added clarity and flexibility for any potential buyer.

This exercise highlights a crucial point: when you’re dealing with a business with imbalanced revenue sources, separating the components and valuing them individually can give you and the seller a much clearer path forward.

 

Understanding the Risk Behind Customer Concentration

Now, unfortunately, the example I just shared is a relatively straightforward one – one that you can break down and clearly say, “Okay, I see exactly what’s going on and I know exactly how to value it.”

However, in many cases, the imbalances inherent to the business are not as obvious or easy to separate from the rest of the business.

High customer concentration is a great example. This is when you have one customer making up an outsized percentage of revenue – still within the same business (unlike the last example).

I previously worked with a Lab member who ran into this exact issue. They found a business they liked, but one customer accounted for 30-33% of the revenue.

Source: WallStreetPrep

 

When they came to me asking how to deal with it, and, namely, how to structure the offer, this is how we approached it:

First, we separated the earnings into two parts: $2 million from the diversified customer base and $1 million tied to that one concentrated customer.

The $2 million represented the core operating business with all the typical challenges, risks, and upsides. The $1 million tied to the single customer was treated as a separate issue entirely.

Next, we valued them differently. Hypothetically, we decided the $2 million core business was worth $6 million, at a 3X multiple. As for the $1 million customer concentration issue, we didn’t assign a traditional multiple, because the earnings weren’t dependable.

Instead, we structured it like this: the buyer would pay 100% cash at closing for the core business, and for the concentrated customer, we proposed an earn-out model. The seller would receive 15% of revenue from that customer for two years or, alternatively, 3% of revenue from that customer forever. The seller chose the option they preferred, and it worked out for both sides.

 

Source: Motiva Business Law

 

Now, here’s an important point: when you’re structuring future payments like an earnout, always peg it to revenue. Revenue is simple to track, and it removes management risk. There’s no room for accusations about poor decision-making, insufficient ad spend, or anything else that might impact profitability. Revenue is what it is – clean and transparent.

By paying $6 million for the core business and handling the customer concentration issue with a separate payout structure, this allowed both the buyer and seller to move forward with a deal in confidence – feeling like the deal felt fair and manageable for both parties.

This is a great example of why I advocate for breaking out these issues and valuing them separately. It gives you clarity and a framework for structuring the deal in a way that aligns with the real risks and opportunities.

 

Why I Saw Customer Concentration & Bought the Business Anyway

When I bought my B2B distribution company, I ran into a similar situation. We had one customer that made up around 20-25% of revenue, which is a pretty significant customer concentration.

I didn’t have the WAV technique then (you’re welcome), so I didn’t work through that exercise, but the customer concentration did put downward pressure on the valuation. I ended up paying 2.7 to 2.8X earnings on that deal.

That said, after doing my own analysis on this specific customer, I decided I was comfortable taking on that risk. Here’s why:

First, the customer had been with the company since the 1980s, so we’re talking decades of history.

Second, replacing what we were doing for them would have been death by a thousand cuts. Everything we provided for this customer was low-value, but it was done at such a high volume that, as a whole, it accounted for 25% of the business’s revenue.

With those reasons combined, the odds of this customer leaving were essentially zero, so it made sense to me to move forward.

 

Source: Michael Marks | Toons ‘N Tips

 

Looking back, I was doing a similar academic exercise to the WAV technique, but it just wasn’t formalized.

Not only did the concentration create valuation pressure when I bought it, but it happened also when I sold it. Even though I tried to diversify revenue, I wasn’t able to outgrow that customer’s influence.

That said, while I owned the company, revenue doubled through acquisition, and that customer’s share of the total revenue increased slightly, from 20-25% to about 26% by the time I exited. Even with the progress I made on multiple fronts, that concentration remained a factor.

The lesson for me was clear: customer concentration will always impact valuation, whether explicitly addressed or not. Understanding and managing it – whether through pricing, diversification, or deal structuring – is important in any acquisition.

 

How to Use the Weighted Average Valuation (WAV) Technique

The WAV technique works by separating components of a business, valuing them individually, and combining them to get a fair overall valuation.

For example, in the first customer concentration example above, we valued the core business at $6 million, and we structured the other portion – a higher-risk component – differently.

By isolating the parts and applying appropriate multiples, the overall earnings multiple becomes a weighted average that accounts for the risks and strengths of each segment.

Here’s how I do it in four steps:

• Isolate the Material Risk

Identify the part of the business that’s causing hesitation. Break it out and acknowledge the rest as the core business you’re buying.

• Value Each Part Separately

Assign a market-based multiple to the core business, then assign a lower multiple to the riskier component. For instance, in my B2B distribution business with decades of revenue and sticky products, a 2x multiple would have been appropriate for the customer concentration segment. For something riskier, like earnings tied to a single customer with no track record, a 1x multiple might make sense.

• Combine the Valuations

Add the two valuations together to determine the total purchase price. This creates a weighted average multiple that reflects the true value of the combined earnings.

• Gut Check

Finally, ask yourself if the deal makes sense for everyone involved. Is the valuation logical and fair enough to be accepted?

The beauty of this method is its clarity. It lets you handle material risks logically and transparently while protecting your interests as a buyer. At the same time, it gives sellers a framework to understand why the offer is fair. It’s all about breaking it down, valuing each piece, and combining it in a way that stands up to scrutiny.

 

Why This Works for Me

This approach has helped me and my clients move forward in challenging situations. By addressing risks directly, I’ve been able to protect my investment while ensuring the seller gets compensated fairly. I’ve also found that this method encourages creative deal structures, like earn-outs based on revenue, which align incentives for the seller and reduce management risk on behalf of the buyer.

Whether you’re dealing with customer concentration, unrelated product lines, or other complexities in a deal you like, don’t let these factors be show-stoppers. The WAV technique can give you a clear framework for navigating risk, valuing businesses accurately, and closing deals with confidence.

If you’re looking to acquire a business in the next 12 months, the Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.