High Customer Concentration Valuation

searcher profile

January 28, 2025

by a searcher from Harvard University in Philadelphia, PA, USA

Hi I have a potential target with almost 70% of its revenue concentrated in two customers. These customers have been with the target company for###-###-#### years. How alarmed should I be about this concentration? Do you suggest it warrants reducing SDE multiples? if yes, to what extent? Thanks

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Large concentrations are always a concern. Customer concentrations in and of themself do not immediately doom a deal. However, there are a number of things to consider when it comes to customer concentrations. I usually recommend understanding the following: 1) How long as that business been a customer of the company? The longer the more likely they are to stay a customer. 2) How many items does the business produce for that customer? The more items produced the stickier the customer is likely to be. 3) What does the competition look like in the market for other potential suppliers to that customer? Is there a lot of competition? What does pricing look like from that competition? 4) How easy is it to move that customers business to another operator and is there a cost to do so? And do you need special licensing or knowledge to manufacture that product or molds, making it harder to move the product? 5) How important is this product to that customer’s overall operation? Is it product likely to stick around and continue to be needed going forward or is it something that might eventually go away? 6) Is there a specific benefit the customer gets from working with the company that would be hard to replicate elsewhere? 7) Lastly, who at the company manages that customer's relationship and how contingent is it upon the seller remaining for that customer to stay? This can be the hardest issue to figure out, but sometimes there are lifetime relationships between customers and sellers that can pose a significant risk. The more of these items you can get comfortable with, the less risk there will be, and the easier it will be to convince lenders and investors the risk is not a concern. I hope this helps. We have gotten some deals with large customers concentrations financed, even using SBA financing, if we can explain away the risk. I am always willing to have a discussion. You can reach me here or directly at redacted
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Reply by a professional
from University of Michigan in Detroit, MI, USA
Hi Anon, as Brad notes, large concentrations are always a concern. From a legal perspective, make sure the seller is willing to represent (in the purchase agreement) that these customers are staying with the business post-close. Additionally, you have to secure a significant chunk of seller financing to ensure that seller has skin in the game (to back up that representation). And, ideally, you will want to have an indemnity/holdback tied to the possibility that one or both of these customers leaves. All things to be discussed. Feel free to reach out if I can be of any help. Reach me at redacted
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