Mitigating customer concentration risk (SBA deal)

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by a searcher
in Dallas, TX, USA

3yrs ago

Mitigating customer concentration risk (SBA deal)

Currently looking at a company that sells private tutoring services to schools. This creates quite a bit of customer concentration (top 3 are around ~90% of revenue). Any ideas on mitigating this risk while doing an SBA deal other than a large forgivable seller note based on 6month retention?

Thanks!

1 Like

359 Views

reply by a professional 2yrs ago
from University of Southern California in North Palm Beach, FL, USA

It won't matter, much, what recourse you have to try to correct a bad deal caused by a customer concentration problem, if you have to devote a large part of your life and money to working your way out of the mess. People who know how to search find businesses without risky customer concentration.

reply by a searcher 2yrs ago
from The University of North Carolina at Chapel Hill in Toronto, ON, Canada

You may want to extend that retention clause to at least 18 months. Some good businesses don't have the proverbial ideal low customer concentration upon which the traditional search fund concept was built. Phenomenal if that is the case, but if not, make sure you you define whether there is a sound business case that can be made: How critical is your service to the customers? how specialized? how easy is it for the customer to switch vendors? does the company have a lot of competitors? are there long-term contracts in place? do you have experience in the space?