High-Performing Business with Client Concentration-- Seeking Advice

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by a searcher from University of Virginia-Darden - Darden School of Business
in Washington, DC, USA

1yr ago

High-Performing Business with Client Concentration-- Seeking Advice

Looking for some collective wisdom on a deal. Here are some details: • Client concentration: top two 15% each; top 5 ~40%; the largest client is the seller's personal friend outside the service area. • Highly competitive, cyclical industry with a seasonal business model—100% on-demand work, no contracts. • Product/services, client relationships, and team are top-notch. • 10-year track record: 10-15% YoY revenue growth; 20-30% SDE margin. • Small, stand-alone deal with ~ $1m EV. • Organic growth likely to continue, but no major upside expected; potential for some inorganic growth via regional expansion.

The asking price is at the top of the range, and the seller is firm against any structured deal—no seller financing or earnout.

From the seller’s perspective, this business will continue to outperform its peers, but as a buyer, I’m concerned about the risks and the lack of opportunity to structure a deal to mitigate them.

Do I push for a price drop or walk away?

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reply by a lender 1yr ago
from California State University, Sacramento in Seattle, WA, USA

Personal relationship of top customer a key diligence issue. Seller relationships and reliance on seller are key areas to dig into. No seller note has the seller missing out on a good way to mitigate risk. We’ll do a down side analysis for any customer that is 20% plus. redacted

reply by a searcher 1yr ago
from University of Virginia in Washington, DC, USA

Thank you all for the advice. In the end, I decided to walk away from the deal because several of the benefits that allowed the seller to achieve the current performance will not transfer after the sale, with the top client being just one example. Additionally, the seller was unwilling to adjust the terms or price.