Customer Concentration Structuring Help

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April 22, 2024

by a searcher from Harvard University - Harvard Business School in Alpharetta, GA, USA

I'm looking at a large deal (a few million in EBITDA) that has about half of its revenue from one customer. Can anyone suggest some structuring solutions to this?

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Reply by a professional
from University of Notre Dame in New York, NY, USA
There’s a few ways to do this, but as others have noted, an earn-out isn't an option under traditional SBA lending. See below for a suite of potential options:

1. Earn-out - Make a sizable percentage of the purchase price contingent on revenue targets and payable on an earn-out schedule. Seller will want to ensure you keep that key contract and may even go to bat for you/ keep one foot in the business to ensure you retain your largest customer. Not available with SBA lending program.

2. Seller note- If using SBA financing, a forgivable seller note could also incentivize a seller to assist the new owner with securing/retaining existing customer revenues since the seller won’t be paid in full unless the company can maintain its business performance.

3. Partial Buyout - In the stock sale scenario, this is simple- you do a partial buyout and the seller retains a percentage of the business. In an asset sale, no equity is being transferred (nothing to rollover), so you’d have to buy the assets with your LLC/Corporation and then issue the seller equity in your LLC/Corp. Seller would get double taxed in that scenario, so a stock sale is always cleaner for rollover equity. Incentivizes the Seller to help retain the largest customer contracts because they'll still have "skin in the game" and will want to hold on to the business upside.

4. Post-Close Consulting Agreement - Occasionally the Seller would be willing to take a reduced purchase price (or "move around the economics") if you offer a post-closing consulting agreement whereby the Seller would get paid out a commission for certain revenue milestones being hit. This isn't an earn-out since it's not part of the purchase price and can be tied to performance under important customer contracts. It just keeps the Seller engaged with economics tied to the retention of customer revenue. I do deals of all sizes with bespoke structures. Happy to dig in a bit more- feel free to DM me or shoot me an email redacted
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Reply by a searcher
from INSEAD in France
I've seen two ways this could be handled. In my book, the business is an employee of the customer, which you never want to be. Also, I don't really understand what you're asking for by "structuring solutions", to structure the deal? Get a discount due to high customer concentration? If so then yes / estimate the likelihood of the client staying after the acquisition - Is the client buddies with the founder? (there is a case study on this I believe, where as soon as the acquisition was completed client left because he was close friends with the founder and just bounced to a competitor) Will they leave you after the acquisition? Any special treatment?

What benefits does having this client bring ? High utilization? Bargaining power with suppliers?

Obviously having 1 client generating 50% revenues is cause for concern - Do you have them locked in? for how long? How much resources are being used to keep this client? both capital and human capital?

1 way to deal with this: Fire the client from the get go and free up resources start from scratch (that would need to be priced into the deal)

Second, aggressive marketing strategy to acquire as many customers as possible to bring that number down to <10%

But more importantly, there are way too many questions, what type of business? Geo? Employees?

Obviously too many questions to really give an answer, and I don't think I'm quite clear about what you're asking for here. Happy to chat further
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