Deal structuring around customer concentration
September 23, 2023
by a searcher from Dartmouth College - Tuck School of Business at Dartmouth in Princeton, NJ, USA
Looking at a manufacturing business with one customer representing ~50% revenues. Any creative ways to structure purchase to mitigate loss of top customer.
So far, I've heard:
1. Seller note with interest and principal subject to financial metrics
2. Portion of purchase price held in escrow subject to financial metrics
Appreciate the help
in Melbourne VIC, Australia
1 - Preferably find another deal that suits your needs. Unless the loss of this client won't impact your bottom line significantly, I would simply not do the deal. This situation is typically way too risky and with too many headaches. If you decide to continue the pursuit of this opportunity, then;
2 - Seek to defer a sufficient portion of the purchase price (vendor finance with clawback) for a period of time that would cover you for the earnings you would lose if the dominant client was to leave during that period. If a client comprises 50% of turnover, then this deferred consideration is likely to be the vast majority of the purchase price. Due to the risk, I would not pay interest on this sum (or at most only a nominal amount)
3 - Use a combination of number two + keeping the vendor involved in the business (handling the client) for a substantial period of time. This is to reduce the risk of attrition. Again, this has to be tied with a structure that incentivises the vendor to retain the client (such as point number two above)
4 - I come back to point number 1 again. Unless the business can be profitable without the client, and unless you have calculated the upfront consideration based on the assumption of the client leaving, I would personally avoid the deal.
If you proceed, essentially assume that you will lost the client, and calculate your price and payment structure accordingly.
Good luck!
in Toronto, ON, Canada
If you’re deadest on purchasing this business your based out of the US so you should qualify for SBA loan. I would structure this deal as a seller finance earn out with a portion coming from a financial institution. Even though SBA would be your best bet for getting this deal across the goal line I would explore other options within the manufacturing industry in particular businesses with diverse revenue streams where one customer does not represent 50% of your business.