Considering a business with high customer concentration

April 03, 2025

by a searcher from Villanova University in Miami, FL, USA

All - I have a potential opportunity, an electrical contracting business that consists of mostly project based revenue. The business has 70-75% of its 2025 revenue tied to a single project (one customer) that is going to complete in 2025.

It should be eligible for SBA financing (as long as a lender is okay with construction) so an earn-out wouldn't work. I'd want a way to incentivize the seller to assist in ensuring the project revenue is replaced with new project(s). The pipeline shared with me shows they have many projects, from multiple customers, with greater than 50% likelihood of being awarded this year which will reduce the customer concentration in back half of 2025 and 2026.

How would you structure a deal like this that would close after the large contract is complete or mostly completed?

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Reply by a searcher
from Massachusetts Institute of Technology in Boston, MA, USA

Thank you for the tag, Luke. Based on the information shared, it’s a bit difficult to pinpoint the specific “value” item you may be acquiring in this transaction. From an ETA lens, the business appears to be largely project-based. The very high concentration in this project —70–75% of revenue tied to a single project, which while only talks about the current state of affairs - but if this is what the business characteristic is or some version of it, it would typically make it a less attractive opportunity. That said, there may be strong factors that offset this concern—such as consistent project flow in a geography which lends to consistent business, long-standing customer relationships, barriers to entry, niche specialization, or if you have a strong background in the industry or limited competition—that make this opportunity more compelling. Assuming the pipeline has some legitimacy and the seller has industry credibility, here are some thoughts on how you could structure the deal to mitigate risk and align incentives:

Deal Structuring Ideas: Seller Note with Performance-Based Adjustments: Structure a seller note with clauses that are adjusted (or partially forgiven) if key milestones—like revenue diversification or project awards—are not met post-close. This keeps the seller incentivized without violating SBA restrictions. Think about partial ownership buy-out.

Hold-back/Deferred Payment: Negotiate a portion of the purchase price as a hold-back payable 12–18 months post-close or even a more longer term, contingent on replacement projects being secured.

Full Seller Note: Figure out what is the minimum buy-out cash the seller will sell at, maybe 15-25% of the purchase price and then carve out everything else as a seller note or some form of deferred payment.

Certainly, in addition to the above, there can be other ways to achieve the objectives of aligning the risk to the structure of the deal

You would also have to consider the aspect of managing and maintaining the license post-close if you may not have a license yourself and the license is tied to the seller and is not held by the company in some other form.

Ultimately, in deals like this, it's all about visibility and control over what happens next. If you can get enough comfort around the pipeline quality, customer relationships, and seller's willingness to help bridge the transition, it could still be a compelling buy. (Just make sure, that you’re not buying into a short-term earnings spike!)

Reply by a searcher
from Baylor University in Chicago, IL, USA

I had a similar situation too. My deal was high cust. concentration. The broker on the deal has educated my seller that they will need to be creative so that is something my seller was open to. I negotiated with the seller and broker using the term "earn out", as this is the language they are familiar with as they deal with bigger PE firms usually. In the LOI I even have it stating "Earnout", of course once we negotiated it all down, by the time we were ready to go to the SBA lender I told them the lender wanted me to exchange the word earnout with "forgivable note" and that nothing else changes as far as the structure or actual payout. At this point they understood. It is important to setup the LOI and PA so that it lends itself to SBA approvable language. This is what my LOI looked like for that earnout section, before I replaced the word with "forgivable seller note".+ I had a visual table below it showing the payout if the benchmark wasn't hit: a. Earnout: $1,000,000 paid over 3 years in the format below: a. Buyer will pay sellers $XX at month 12, 24, and 36 with a forgiveness of 10% of the earnout for every 5% decrease in yearly benchmark revenue from key customer. (See example table below) b. Benchmark: $2,000,000 c. Review Dates: 12 months post close, 24 months post close, 36 months post close

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