The 40% Rule: Do You Have Too Many Eggs in One Basket?
“Don’t put all your eggs in one basket.” (Idiom)
Most founders track revenue growth. Fewer track where that revenue comes from. Client concentration risk arises when a single customer, or a small cluster of customers, accounts for a disproportionate share of revenue. In some industries it can be natural to have larger customers, especially in business-to-business markets with long-term contracts. But as dependency grows, revenue becomes fragile in ways that aren’t obvious from top-line growth figures.
Having many of your eggs in one basket exposes you to sudden revenue shocks if a key client reduces orders, delays payment, or – horror of horrors – ends the relationship. The “40% Rule” is a practical red flag used by bankers, acquirers, and investors: if a small group of clients contribute 40% or more of total revenue, the business carries material concentration risk.
This article unpacks why 40% matters, how it influences due diligence, and what business owners can do to reduce exposure without destabilising current income.
Why the 40% threshold matters
The “40% Rule” is not an ironclad regulation, but a pragmatic benchmark widely used in finance, banking, and valuation circles. When one or two clients account for around 40% or more of revenue, credit committees, acquirers, and investors often treat it as a material concentration risk. Above this level, the loss of a single account can eliminate a large portion of expected cash flow, put pressure on fixed costs, and lead to breaches of debt covenants.
If you pass the 40% mark, lenders may become cautious or impose stricter terms on financing. This makes sense, as your ability to pay them back is contingent on a relationship they cannot control.
How concentration risk affects business finances
The financial impact of client concentration extends beyond headline revenue figures. Concentrated revenue makes cash flow volatile and forecasting uncertain. One delayed payment or unexpected order reduction from a large client can create immediate cash flow problems, especially where fixed costs such as payroll and rent are significant. Beyond the risk issues, a dominant client can also gain leverage in pricing and contract negotiations, which can erode margins quietly over time.
The strategic and operational side of concentration
This risk can go beyond the pure financials. When one client drives a large share of revenue, internal and external decisions can begin to revolve around that relationship. Product development may align too closely with the needs of your largest client, diverting focus from broader market requirements. Marketing and sales efforts can end up prioritising retention of that client at the expense of diversifying the portfolio.
Market valuation and exit implications
For owners considering a sale or seeking external capital, client concentration can have a significant effect on valuation. Buyers and investors seek predictable, diversified revenue streams. A company with a single client contributing a large share of its revenue is often seen as riskier.
The 40% threshold often becomes a pivot point in negotiations. Buyers may discount offers or tie price adjustments to post-acquisition retention of key clients. Similarly, lenders pricing credit facilities take concentration into account. Companies with high concentration may face higher interest rates, tighter covenants, or requirements for collateral. In extreme cases, banks may refuse financing until concentration metrics improve.
Managing and reducing concentration risk
Addressing concentration risk starts with measurement. Your accountant can help you calculate the percentage of revenue each client contributes, as well as the combined share of the top five clients. Monitoring trends over multiple quarters helps identify whether concentration is rising as a natural business outcome or creeping up unnoticed.
Strategic actions to reduce concentration are most effective when pursued deliberately and gradually. This could involve targeted business development efforts to land new clients, segment diversification to broaden revenue sources, or pricing strategies that balance revenue concentration without sacrificing profitability. Diversification need not diminish the value of large clients. It’s about strengthening the overall revenue base so that losing any one account does not destabilise the organisation.
Final thoughts
Client concentration risk is a silent strategic threat that often hides behind strong revenue figures. Reaching the 40% threshold can transform a seemingly healthy business into one that is vulnerable to external decisions and internal inertia.
Your Tax Deadlines for April 2026
- 01 April: Start of the 2026/27 Financial Year
- 07 April: PAYE submissions and payments
- 24 April: VAT manual submissions and payments
- 29 April: Excise duty payments
- 30 April:
- VAT electronic submissions and payments
- CIT Provisional Tax payments where applicable.
15% Global Minimum Tax (GMT) Goes Live at SARS
“An agreement that will really change the world.” (Olaf Scholz, former German Finance Minister)
| In October 2021, a global minimum tax framework for large multinational enterprises (MNEs) was established with the introduction of the GloBE (Global Anti-Base Erosion) model rules by the OECD (Organisation for Economic Cooperation and Development).
These rules address profit shifting by multinational groups to low- or no-tax jurisdictions and ensure a minimum level of tax is paid on income in every jurisdiction in which MNEs operate. South Africa enacted the GloBE minimum tax legislation in 2024 and 2025, enabling SARS to impose a multinational top-up tax at a rate of 15% on the excess profits of affected MNE Groups. This tax effectively brings the overall taxation of foreign profits up to a minimum agreed level of 15%, where those profits have been subject to little or no tax offshore. As such, the GMT is expected to generate significant additional tax revenues by curbing tax avoidance, ensuring multinational corporations contribute their fair share of taxes, and extending the country’s tax base. The GMT is expected to raise an estimated R2 billion in South African tax revenues. The broadened tax base will open opportunities to lower the personal income tax burden on individuals, or to consider more globally competitive corporate tax rates than the current 27%, which is well above the international average. Which companies are directly affected?
The GloBE Rules apply to MNE Groups whose consolidated annual revenues equal or exceed EUR 750 million in at least two of the tax years immediately preceding the reporting fiscal year. GMT deadlinesThe local legislation governing GMT is deemed to have come into operation on 1 January 2024 and applies to MNEs’ subsequent “fiscal years”. Here are the deadline dates as published by SARS.
Source: SARS How will the tax be calculated?
Registration and reporting obligations
SARS is ready: Are you?SARS is actively preparing to administer the GloBE framework, with a dedicated project team, including IT and system engineers, and a specialised unit within its Large Business & International Unit. It aims to promote voluntary compliance and simplify adherence with the GMT legislation. Even so, a significant compliance burden and increased reporting scrutiny awaits affected companies. They will have to comply with new and technically demanding rules, even if no global minimum tax is ultimately payable. This will likely require specialist expertise, resulting in substantial additional compliance costs. |
