Mitigating customer concentration risk (SBA deal)

November 12, 2022

by a searcher in Dallas, TX, USA

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!

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I would be more than happy to jump on a call to discuss the specific request. We are a Commercial Loan Brokerage Shop and we do quite a bit of SBA acquisition financing. I can walk you through the different strategies. Although there is certainly risk from a buy perspective, we have found ways to get SBA lenders comfortable with the concentration risk even when it does exist. It really depends on the situation. We closed a deal two years ago where 80% of the revenues was with two customers via an SBA 7A business acquisition loan. We got them comfortable with those customers. I can be reached here or directly at redacted Thank you.

Reply by a searcher
from Lamar University in Dallas, TX, USA

Are there contracts in place? For example, does the tutoring group have the schools enter a 1/3/5 year contract for the services? If so, that can help hedge the risk. Another important thing to consider is: are these relationships in place due to the current owner/operator and therefore going to walk when they exit or will they stay in place? The top 3 customers representing ~90% of revenue is quite concentrated and losing even 1 of those key customers could be detrimental for the business. Keep us posted on how this goes and if you end up pursuing! Best of luck.

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