Has anyone worked with investors that will consider a buying a business with customer concentration risk?

January 06, 2021

by a searcher from University of California, Los Angeles - UCLA Anderson School of Management in Los Angeles, CA, USA

Investors & Searchers,

Has anyone worked with investors that will consider buying a business with customer concentration risk?

My group has come across an excellent opportunity with great financials, it has a high revenue growth rate 30%+ and EBITDA above $5M+. The one red flag with the business is the customer concentration risk, however this is somewhat mitigated by the duration of time they have been doing business with their clients.

Please post any investors you may know that have worked with opportunities like this before, thanks!

Reply by an investor
from The University of Chicago in Chicago, IL, USA

If the concentration is held by a handful of customers (i.e. 60% held by 3 ~ 5 accounts), the deal could be extremely difficult if not impossible to get done. It is important to remember that even if it is structured correctly where the seller must wait for receipt of the full valuation (incl. debt relief) - it means that you (the buyer) have waited long enough to be comfortable with the risk. The problem is that when you sell the business, the next buyer will expect the same of you and your investors. Opportunities like this are interesting for an entrepreneur but are not necessarily suited for the professional investment community.

Reply by a searcher
from Texas A&M University in San Antonio, TX, USA

It depends on the specifics. If the target company provides an essential service that would be difficult or impossible for the customer to replace (e.g. no competitors in the market) 25% - 30% customer concentration is probably okay. Especially if the relationship is contractual, the customer is financially stable, and the relationship has a long history. Beyond that, you are probably looking at a forgivable seller note on standby for 2-3 years to bridge the gap in valuation.

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