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What 'Diversification' Actually Means for Your Business
Issue #49
Welcome back to the Mid Market Insider!
Today, I’m diving into what diversification actually means for a business, and why it’s about more than just avoiding customer concentration.
I first learned the real meaning of diversification in college. My investments professor told us:
“If you want to get rich, put everything into the stock of a single company. If you want to lose everything, put everything into the stock of a single company.”
It stuck with me… because both statements are true.
The same principle applies to more than investing. Whether it’s your career, your business, or even your personal life, putting all your reliance in one place creates fragility.
In business, you’re told to diversify as much as possible, but what does that actually mean?
Most people think, “Don’t let one customer be 30%+ of revenue,” and stop there.
Useful, but too narrow.
We take a very expansive view on what diversification means.
In particular, there are two main areas to spend most of your time and resources on:
1. Revenue Diversification
Not just “how many customers,” but:
Mix by industry and end market (how cyclical are they?)
Product/service mix (one hero SKU vs a portfolio)
Channel/geography (one region or one platform risk)
Revenue type (recurring vs project; contract length and terms)
Concentration math (single customer >30% or top 5 >60% are typically red flags)
Ask: if one segment freezes or a macro shock hits, does cash flow hold?
2. Sharing The Load
This is key man risk, often you, sometimes another key member of the business.
Can the business operate smoothly if you disappear for 30 days?
Are customer relationships distributed beyond the owner?
Are decisions and processes documented (or trapped in heads)?
Are there 1–2 key members ready to step up in the event of an emergency?
Diversifying your business isn’t about trying to be all things to all people.
It’s about building resiliency and optionality so one event, one customer, or one person can’t limit your growth.
Reader Question of The Week
For context, this is a recent section I’ve decided to add. After receiving many questions in my day-to-day as the co-founder of Four Pillars, I wanted to share the most common ones in my newsletter in hopes that it’s valuable to you in some way.
If you have a question you want answered in a future newsletter, please reply directly to this email and I’ll do my best to answer it. Now, onto this week’s question:👇
Q: "I have one customer that is 40% of my business but they keep giving us more work. No way would I decline the work, but concentration will only go up. What is your response to that?"
Good question and a very real challenge. First off, your customer might not like to hear that they represent that much of your revenue.
It will be considered a risk to them as well. The main action I would take though is to establish an actual budget to pursue new customers. Perhaps that budget is a percentage of cash flow from your large customer. Budget dollars could be used for new staff, trade shows, marketing & advertising, etc.
Regardless, saying “No” to a customer can have unintended consequences so that just means you have to double down on finding new customers.
📺 What to Watch This Week
Watch one of our recent videos on YouTube…
Building Companies That Last: Strategies for Sustainable Growth
Click the link below and check it out:
That’s all for today’s newsletter! Thanks for reading!
📅 Next Week:
Next week, I’ll be walking through an investment memo we recently did on a custom machining and fabrication firm.
I’ll highlight what we analyzed in depth, what strengths and weaknesses we determined, and what our final verdict was on the business (move forward… or pass).
Keep building,
Nick
P.S.
If you want to discuss your business goals in greater detail, book a discovery call: