Adjusting multiples when a business has buyer concentration

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July 22, 2024

by a searcher from London Business School in London, UK

Hi folks, looking at business (enterprise software, <1$m EBITDA) with a large multinational client that takes up just under 50% of revenues (albeit across multiple geographies / BUs) . Any examples of adjusting multiples in this case to cope with client concentration?

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Reply by a searcher
from INSEAD in France
Though a definite red flag, as you become the employee of the client instead of the service provider at ~50% revenue.

The adjusted multiple can be a anything you want it to be and depends on what you are comfortable with paying, 10, 20,30,40,50% discount whatever it is.

Best way I would assess the risk of having such a big client is

1. Identify the relationship between owner and client, is it his/her best bud? ; Client / Provider relationship ? ; Anything in between? ;

2. Is it contractual? How long is the contract, if the contract is still for the next 5 years with strong protection in case of breaking the contract, then you should be fine and no discount needed but then again you would need to have a strong customer acquisition strategy to bring that bad boy % down
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Reply by a searcher
from The University of Chicago in Chicago, IL, USA
Griffin has the right approach, I'd typically structure some time of earnout seller financing which makes a big portion of the payment contingent on those customers staying for at least a few years. Often times a seller will say something like "those customers have been with me for decades, there's no way they'd leave" and my response is, "that's perfect, then there's no chance you don't get the deferred payment and I'll even put some interest on top of it for you, should be the safest investment in the world..." Large multi-nationals are even more risky in my opinion as you'll likely have very little control over those businesses and their purchasing decisions. That business could literally go away in an instant due to some re-org/strategy change, etc. I'd proceed with extreme caution.
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