80% revenue in top 3 clients too much risk for SBA 7a loan?

September 30, 2023

by a searcher in Loudon, NH, USA

I'm looking at a graphic design company where 80%+ of the revenue is coming from the top three client relationships. The business only has about 18 clients and does corporate print projects in a particular niche. The seller is also still spending about 50% of their time working 'in' the business in a creative director role, despite having other employees.

My question to the SBA lenders here (and anyone with first hand experience), is this sort of client concentration on a asset-light service business something that most (if not all) SBA lenders would shy away from? I would personally look to use seller financing with an earnout for 50% or more of the deal to insure the seller does their part to assist with the transition of these client relationships. I don't think it's a good deal to personally guarantee a fixed payment loan of any kind on something like this, even if a lender were to approve one. My appetite for risk isn't there but I'm curious if lenders would agree or not. The selling broker feels this is stable enough to go SBA but I'm wondering if that is really the case.

Thanks.

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

Great question. Revenue concentrations on the service are not enough to kill a deal with the SBA. Lenders will look into how much business each of those companies represent; what is the relationship between the seller and those businesses and how might that be impacted with a change; how many other suppliers or competitors there are and what does that pricing look like; how long have they been customers of the business you are looking to acquire; and what niche items does your business provide that will keep them coming back to your business. If there are reasonable answers to move of these questions, it should not be a problem. As an example I did a deal three years ago where two customers made up 90% of revenue, and the SBA lenders were fine because both had been customers of the business for over 20 years and there were a lot of different skews they were manufacturing for those two customers, so it would be hard for them to just pick up and move all of that business.

The challenge you will run into if you want to do a traditional earn-out is that they are not allowed under SBA financing. The whole purchase price needs to be in place and for the most part funded in one way or another at closing. The only way around that is to do a seller note that has forgivable features in it if certain business metrics are not met. That ends up being your way to backed into an earn out. I would be more than happy to jump on a call to discuss your particular transaction at any time. You can reach me here or directly at redacted Good luck.

Reply by a searcher
from Massachusetts Institute of Technology in Cambridge, MA, USA

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