Customer concentration risk and pricing

by a searcher from Iowa State University - College of Business

10 months ago

Hi all,

how do you think about customer concentration risk when it comes to pricing a deal. I’ve run into several speciality contractors who have some significant risk (one at 80% of revenue to one client!). My view to date has been to reduce the multiple, but brokers don’t seem to agree on that and banks don’t seem to want to touch those kind of deals at all. 

any experience doing a deal like that?

1 like
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6 comments

searcher from University of Virginia

Could be a good option: 'Forgivable Seller Notes' that are pegged to certain customers maintaining their spend/revenue levels.

2 months ago | like reply | 0 likes

searcher from University of Oxford

Hi Adam, High customer concentration has been the number one reason I’ve dropped deals. If a lender or investor is uncomfortable supporting a transaction due to high customer concentration, chances are they’re right. You could also end up wasting a lot of time trying to get the seller to take on the risk—whether through a high seller note or a lower price—both of which are usually unattractive to the seller. Another factor to consider is the quality of earnings from these large customers. Are they reliant on your service exclusively? Is there a contract in place? etc

2 months ago | like reply | 0 likes

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