Only 2 customers but otherwise a great business - how to finance?

May 22, 2024

by a searcher from Duke University in Chicago, IL, USA

I'm in pre-LOI discussions with a business that has ~$1.4M revenue and ~$550k EBITDA (~40% margins). However, the business is only a few years old and has grown solely through the acquisition of its first and second customers.

The customers are under contract but they only need to provide 30 days notice to discontinue service.

Other than the customer concentration, it's a growing business that is leading the development of a niche B2B services industry. Seller wants a reasonable multiple (<5x EBITDA) but I'm struggling to get comfortable with a personally guaranteed loan and no seller financing available.

Any ideas? Willing to include anyone who has a creative solution in the deal as a minority partner.

Reply by a searcher
from University of Calgary in Calgary, AB, Canada

Thanks for the tag ^redacted‌. Limited history, two customers with 30 day cancellation, no vendor financing and taking on PG tick many of the higher risk boxes on this one overall. I would be weighting consideration heavily to earn-out or VTB tied to customer retention as suggested above and spending considerable time on understanding the two customers in diligence if you move forward. Have some language on this. DM and I can find it and send.

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

^redacted‌ thank you for the tag. I agree with most of the comments made here. It is going to be very hard to finance with conventional debt. The short history combined with the fact the contracts can be cancelled make this a very high risk business. I would recommend pushing seller financing or an earn-out. Outside of that you are going to struggle to find conventional or SBA debt for this deal.

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