You think your business is exit-ready.
Your revenue is solid. Your margins are healthy. You've grown year-over-year. You've built a team. You've got customers.
Then a buyer walks through diligence and applies a 30-40% discount to your multiple.
You're stunned. You ask: "Why? We're profitable. We're growing."
And the buyer says something vague about "execution risk" or "operational gaps" or "customer concentration."
What they're really saying: We see five things wrong with your business that you don't.
And those five things are costing you millions.
The Valuation Discount Nobody Sees Coming
Here's the hard truth: buyers don't pay for what you have. They pay for what they can reliably extract after they own you.
A profitable business with operational chaos is worth less than a less-profitable business that runs like clockwork. Because one can scale. The other can't.
Most owners focus on revenue and margins. Buyers focus on risk. And risk lives in five specific places that most owners have completely blind spots on.
Let me walk you through each one. And more importantly, how to audit your business for them right now.
Killer #1: Concentration Risk (Revenue, Customers, Key People)
This is the most obvious one. And it still kills deals.
What it looks like:
- Your top 5 customers represent 70% of revenue
- One customer is 40% of your annual revenue
- Your best salesperson brings in 60% of new business
- Key operations depend entirely on one person
- All your revenue comes from one product or service line
Why buyers discount it: Because they know what happens when the big customer leaves, or the key person walks. Revenue collapses. And they're stuck owning a broken business.
What they actually see: During diligence, they map your customer concentration. They interview your top 3 customers (and you cringe because you realize you've never actually documented why they stay). They ask about succession plans for your top performer (and you realize you don't have one). They ask how much revenue would evaporate if any single customer left.
If the answer is "a lot," your multiple gets crushed. Sometimes by 1x-2x.
How to audit yourself:
- Pull your revenue by customer for the last 3 years
- What percentage do your top 10 customers represent?
- If it's over 60%, you have a problem
- Now do the same for your sales team. Which rep brings in what percentage of revenue?
- If one rep brings in more than 30%, you have a people concentration problem
- Finally, map your business by revenue line. How many products/services drive 80% of revenue?
What to do about it: This is a 2-3 year fix, but start now:
- Actively diversify your customer base (don't chase one big customer)
- Document why your top customers stay (so it's not just relationships, it's value)
- Cross-train your top performers (so they're not heroes, they're teachers)
- Build a second revenue stream (so you're not entirely dependent on one product)
Killer #2: The Heroic Founder Problem
This is the silent killer. And it's specific to owner-led businesses.
What it looks like:
- You're still involved in major deals
- Key decisions wait for you
- Your team defers to you on strategy
- Customer relationships live in your inbox, not in systems
- Your team can execute, but they can't think strategically
Why buyers discount it: Because they know the business can't survive without you. And their entire value creation plan depends on you staying and building systems.
Most PE firms account for this by applying a "key person discount"—anywhere from 0.5x to 2x off your multiple. Sometimes they don't even do the deal because the risk is too high.
What they actually see: They interview your team and ask: "What happens if [founder] leaves?" If the answer is panic, you have a problem. They look at your organizational structure and ask: "Where does strategic thinking happen?" If the answer is "in the founder's head," you have a problem.
They look at your top 5 customers and ask: "Who manages this relationship?" If it's you, they ask: "What happens if you leave?" If there's no documented answer, your multiple takes a hit.
How to audit yourself:
- Make a list of the 20 most important decisions your business makes annually
- How many of them require your approval?
- If it's more than 3-4, you have a heroics problem
- Now look at your top 5 customer relationships. Who actually owns them? You, or your team?
- Finally, ask your team: "If I left tomorrow, what would break?" If they hesitate, you have a problem
What to do about it:
- Document your decision-making process (what decisions get made at what level?)
- Assign ownership of key accounts to your team (not you)
- Build a management team that can think strategically, not just execute
- Create a 12-month transition plan where you gradually step back from operations
- The goal: your business runs without you
Killer #3: Customer Health You Don't Actually Know
Most owners think they know their customers. They don't.
What it looks like:
- You don't track churn rate
- You don't know your net retention (expansion vs. contraction)
- You have no idea which customers are at risk of leaving
- Customer satisfaction is "gut feel," not data
- You lose a customer and nobody saw it coming
Why buyers discount it: Because customer health determines future revenue. If your customer base is slowly dying (high churn, no expansion), your business is slowly dying too.
Buyers want to know: Are these customers sticky? Do they expand with you over time? Or are they transactional and likely to leave?
What they actually see: During diligence, they pull your customer data and ask:
- What's your annual churn rate? (You fumble the answer)
- Which cohort of customers from 3 years ago are still with you? (You realize you've never actually tracked this)
- Do your customers expand over time, or do they stay flat? (You realize you don't know)
- Which customers are at risk? (You have no idea)
If your answers are vague, they assume the worst and discount accordingly.
How to audit yourself:
- Pull your customer list from 3 years ago. How many are still customers?
- That's your retention rate. Most buyers want to see 90%+ for healthy businesses
- Now look at your customers' spending with you over time. Are they expanding, flat, or contracting?
- Finally, can you identify which 3-5 customers are at risk right now? If you can't, you don't have visibility
What to do about it:
- Start tracking churn and retention religiously
- Implement a customer health score (even something simple: are they expanding, flat, or shrinking?)
- Have quarterly business reviews with your key customers
- Build an expansion playbook (how do you grow wallet share with existing customers?)
- Track this monthly in your board meetings
Killer #4: Operations and Systems Don't Match Your Revenue
This one is sneaky. And it kills a lot of deals.
What it looks like:
- Your processes are documented in people's heads, not in systems
- Onboarding a new customer takes 6 weeks and requires intervention from you
- Your delivery team can't tell you exactly what they deliver or how
- Quality is inconsistent customer to customer
- Scaling requires hiring a ton of new people, not building systems
Why buyers discount it: Because they bought your business to grow it. If growth requires hiring 10 new people for every $1M in revenue, the unit economics don't work. So they discount your valuation based on "scalability risk."
What they actually see: They interview your operations team and ask: "Walk me through how you deliver for a customer." If the answer involves a lot of "it depends" and "it's different each time," they see chaos.
They ask: "What's your cost to deliver per customer?" If you can't answer, or if it varies wildly, they see operational risk.
They look at your team structure and ask: "How many delivery people per customer?" If the ratio is bad (too many people per customer), your margins scare them.
How to audit yourself:
- Can you document your core delivery process in 2 pages? If not, you don't have one
- What's your actual cost to deliver per customer? (Most owners don't know)
- How much variation is there customer to customer?
- If you were to double revenue, how much would you need to grow headcount? If the answer is "double it," you have a scalability problem
What to do about it:
- Document your core processes (even if they're simple, they need to be written down)
- Standardize as much as you can (the goal is consistency, not perfection)
- Build delivery efficiency metrics (cost per unit delivered, time per customer, etc.)
- Create a scalability model (revenue per employee, margin per employee)
- Show that you can grow revenue without proportionally growing headcount
Killer #5: The "Relationship" Business (When It's Not Really About Relationships)
This is specific to service businesses and industrial companies. And it's a silent killer.
What it looks like:
- Your business is built on personal relationships
- Customers work with you because they work with you specifically
- You've never documented what the service actually is
- It's hard to replicate your delivery
- You assume your customers will follow you anywhere
Why buyers discount it: Because they know the customer relationship dies when you sell. And if the business is entirely dependent on relationships, the customer goes with it.
What they actually see: They talk to your customers and say: "Why do you work with [business]?" If the answer is "Because I like working with [owner]," that's a red flag. Because they know that when you leave, the customer relationship goes with you.
They ask: "Could you work with someone else on this team?" If the customer hesitates, they see risk.
How to audit yourself:
- Talk to your top 5 customers. Ask them: "Why do you work with us?"
- Count how many times they mention you personally vs. the business
- If more than 50% of their answer is about you, you have a risk
- Now ask: "Could you work with another member of our team?" If they hesitate, you have a problem
What to do about it:
- Systematize your service delivery (so it's not dependent on you)
- Introduce your customers to your team early (build relationships with the business, not just with you)
- Document what makes your service valuable (so it survives without you)
- Build a reputation for the business, not just for you
- Cross-train your team on your key relationships
The Audit: Do This Today
Pull up a spreadsheet and answer these questions:
Concentration:
- Top 10 customers as % of revenue? (Should be under 60%)
- One customer as % of revenue? (Should be under 20%)
- Top rep's revenue as % of total? (Should be under 30%)
Founder Dependence:
- How many of your 20 most important decisions require your approval? (Should be under 5)
- Who owns your top 5 customer relationships? (Should be your team, not you)
Customer Health:
- What's your annual churn rate? (Should be under 10% for healthy businesses)
- What percentage of customers from 3 years ago are still with you? (Should be 90%+)
- How many customers are expanding vs. flat vs. contracting? (Should be mostly expanding or flat)
Operations:
- Can you document your core delivery process? (Yes or no)
- What's your cost to deliver per customer? (You should know this)
- Revenue per employee? (Track this monthly)
Relationship Risk:
- How many customers say they work with you because of you personally? (Should be under 50%)
- Could your customers work with your team instead? (Should be yes)
Score yourself:
- If you got 90%+ of these right, you're in good shape
- If you got 60-90%, you have some work to do
- If you got under 60%, you have significant valuation risk right now
What This Means
These five killers typically cost you 1x-2x on your EBITDA multiple. That could be $5M-$20M depending on your EBITDA.
The good news: they're all fixable. But they take time. Which is why you need to start now, not when you're in the boardroom with a buyer.
The companies that command premium multiples aren't the ones with the most revenue. They're the ones that have systematically eliminated these risks.
Start with one. Fix concentration, or document your founder transition plan, or get visibility into customer health. Then move to the next.
In 18-24 months, you'll be a completely different business in the buyer's eyes.
Pillar Optimization Partners, where we help owner-led industrial and B2B service businesses identify and eliminate these hidden valuation killers before they hit the market. If you're thinking about an exit in the next 3–5 years and want to know what you're leaving on the table, let's talk about a Valuation Readiness Assessment.