Creative deal structure

December 15, 2023

by a searcher from Florida State University in Leesburg, FL, USA

I’m looking at a business with high customer concentration. Given increased risk of the acquisition, I’m curious what recommendations you all would have on how to structure the deal to protect the business should the small number of main clients leave after the transition. For example, a forgivable seller note but under what terms. Thank you

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Reply by a professional
from University of Michigan in Detroit, MI, USA

Great question. There are a number of ways in which you can protect yourself as a buyer. But moreover, customer concentration doesn't necessarily mean high risk. How sticky are the customers? Or, put differently, what's the revenue quality look like? The seller might be willing to represent that certain material customers will stay on for at least a certain amount of years (back it up with an indemnification provision). As you point out, a seller note is also a common tool. As for the terms, that depends on the context. For many small (10MM or less) SBA financed purchases, we often see 10 or so percent, subordinate to the SBA loan, with a two year standby period.

Reply by a searcher
from Florida State University in Leesburg, FL, USA

Of the top two clients, both have been with the company under 10 years. From information I have available thus far, most companies place orders every 2 months. No contracts. Many companies pay a majority of the purchase price upfront except the largest. Could you describe revenue quality further if I’m not addressing adequately?

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