Standby Note to Mitigate Customer Concentration

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by a searcher from Western Washington University
in San Francisco, CA, USA

1yr ago

Standby Note to Mitigate Customer Concentration

I'm looking at a company with the following customer concentration:

Customer A) 21%
Customer B) 8%
Customer C) 7%

The company has monthly contracts, and the customers are fairly loyal to the owner, posing a risk of churn upon transition.

The sellers don't want a contingent or forgivable note; thoughts on having one on a 2-year stand-by to mitigate the risk? The idea would be that if the top customer churns, I'll have the runway to make up revenue before the note comes due.

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reply by an intermediary 1yr ago
from Rutgers in Cherry Hill, NJ, USA

Coincidentally, today, Nick Molina shared what he did in a similar situation: "I’m dealing with this right now in a large properly mgt business I’m getting ready to close on. I am mitigating that risk by having a 20% seller note that is forgivable based on client attrition in tranches up to 75% forgivability. During the 2 year forgivability period, I will be focused on establishing my own relationship with the clients." Thought this would be something that could work well for you too. Wish I knew how to tag Nick the way Luke tags us.

reply by a searcher 1yr ago
from INSEAD in Calgary, AB, Canada

We have a deal under LOI with concentration. Our mechanism is as follows:
Tied to the VTB, if revenue drops by x in year 1 - results in VTB reduction at 50% of revenue loss. 25% in year 2. If revenue is at par after 2 years then the VTB stays at 100%.

This is based on the top clients staying, not affected by new revenue.
As the VTB is on standby to the senior lender we feel 2 years is enough to establish new relationships with the client and the seller is incentivized to ensure successful transition.