Customer Concentrations abound in LMM SBA type transactions

(Reposting this from my linked in. @redacted‌ and I see this on a weekly basis and already several times this week and its only WEDs.) Customer concentration is extremely common in LMM/SBA deals — and that’s not inherently “bad.” Sellers (usually debt free) often have perfectly valid reasons for why the business ended up concentrated. But for buyers taking on high SBA leverage, that same concentration risk hits very differently. Here are a few things buyers should be thinking about: 🔎 1. Anything above ~20% concentration deserves real scrutiny • One customer • One referral partner • One channel If it drives 20%+ of revenue, that’s a risk you need to underwrite intentionally. 🏭 2. Do you have the industry experience to replace or grow beyond that customer? If the seller hasn’t diversified, how realistic is it that you will? Sometimes it isn’t even a sales issue — it’s a labor constraint. The demand exists, but the workers don’t. 🛡️ 3. Ways to Mitigate Customer Concentration Risk ✔️ Price the deal so DSCR can still break even even if the key customer leaves. This is one of the most honest risk checks you can do. ✔️ Bank structure: • Seller note tied to customer retention • Escrow holdback tied to customer transition ✔️ Alternative structure: No senior bank debt — buyer brings equity, seller carries a note + earnout. (Just remember: you’ll likely need a line of credit in place before closing.) 🚫 4. Sometimes the right answer is: “This is too risky for a first‑time buyer.” Especially when: • No industry experience • High leverage • Heavy concentration Some opportunities involve great businesses… just not great SBA deals. If you want help thinking through a specific structure or concentration profile, we're happy to share what we're seeing in the market. DM: redacted redacted