Customer Concentration under Contract

searcher profile

October 28, 2024

by a searcher in Nashville, TN, USA

Potential acquisition has 60% customer concentration under contract ($1.6MM EBITDA - recurring revenue model in the commercial services space). The contract has 8 years remaining. I am familiar with some of the methods to decrease customer concentration risk, and the seller won't entertain above a 25% note.

Is this acquisition bankable?

There is no guaranteed, immediate plan to significantly decrease customer concentration through new revenue.

Is this just a hard pass?

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commentor profile
Reply by a lender
in Falmouth, MA, USA
With the 25% note covering some ground, you’ve managed to reduce part of the risk, but there’s still significant exposure. I agree with everyone who emphasized the strength of the eight-year contract and the client’s creditworthiness. Is there any situation where this client won’t be around long enough to fully support the contract terms? If not, would a diversification strategy be in place early enough to protect against any single-client risk? Addressing concentration risk in a way that reassures investors and creditors could make a real difference in solidifying confidence in the deal. A robust non-compete is a must.
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Reply by a lender
from Bloomsburg University of Pennsylvania in Ambler, PA 19002, USA
What about considering a partial change of ownership that would keep the seller in long term to better "safely" transition the contract? That plus a combination of a seller note (maybe with forgiveness) may both derisk the deal enough and improve some of the DSCR with you buying a fraction of the total EV. Happy to chat about this in further detail to better understand the scope of the deal (for what's its worth I am currently working with a buyer structuring out a deal with ~75% customer concentration and there is bank appetite). redacted
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