Software Deal - Customer Concentration

December 07, 2023

by a searcher from London Business School in London, UK

How have others dealt with extreme customer concentration?

I'm looking at a software business with 2 year contracts and 40% EBITDA margins. Serves a large TAM in a growth market. Sticky product. 25,000 users.

But only 5 (blue-chip multinational) customers and the 3 largest are 70% of the turnover.

Suspect this makes it a non-starter, but I'm curious if anyone has acquired a business with similar concentration successfully (or not). I believe there is an opportunity to markedly improve the underinvested sales & marketing operation.

Vendor is also open to favourable transaction structuring.

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

Customer concentrations is not in and of itself a deal killer. When you need to consider is the following: 1) How long have those customers been with the business? 2) How sticky is the product they are using? Is it something they can easily replace? 3) What does the competition look like and is there risk from a competition perspective? 4) How badly would the business be impacted if they lost one of the larger customers and can you mitigate that risk with the structure on the transaction? 5) How strong are those customers and is there any risk of losing them to failure? 6) How key is the seller to those relationships? Namely, if the seller is gone is there a much larger risk of losing those relationships?

Overall we have done deals in the past with very large customer concentrations if we can make the argument on why there is not much risk, mitigate the risk, or do a combination of both. I think you need to weigh the risks with how creative you can get in putting a structure together that would make sense. If I can help in any other way or from a financing perspective, you can reach me here or directly at redacted Thank you and have a great day!

Reply by a searcher
from Southwestern University in Houston, TX, USA

I'd also look at the contract length, if such a thing exists.

The challenge is that no amount of risk information is likely to get software / SaaS owners to agree that their company isn't worth the largest SaaS multiple they've seen. At least not at first.

I like ^redacted‌'s "multiple seller notes" - essentially an earn-out tied to continued revenue from the main clients - approach. It ultimately puts the seller in the position of backing the inevitable, "They've been with us forever and will never change," statement.

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