High-Performing Business with Client Concentration-- Seeking Advice

searcher profile

October 10, 2024

by a searcher from University of Virginia-Darden - Darden School of Business in Washington, DC, USA

Looking for some collective wisdom on a deal. Here are some details: • Client concentration: top two 15% each; top 5 ~40%; the largest client is the seller's personal friend outside the service area. • Highly competitive, cyclical industry with a seasonal business model—100% on-demand work, no contracts. • Product/services, client relationships, and team are top-notch. • 10-year track record: 10-15% YoY revenue growth; 20-30% SDE margin. • Small, stand-alone deal with ~ $1m EV. • Organic growth likely to continue, but no major upside expected; potential for some inorganic growth via regional expansion.

The asking price is at the top of the range, and the seller is firm against any structured deal—no seller financing or earnout.

From the seller’s perspective, this business will continue to outperform its peers, but as a buyer, I’m concerned about the risks and the lack of opportunity to structure a deal to mitigate them.

Do I push for a price drop or walk away?

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Happy to take a look at the transaction and help you value it from a lending perspective. The customer concentration risk in and of itself is not that bad. We see way worse concentrations on other transactions and they still work. I think the biggest issue is the seller not willing to take on a seller note. As for valuation, it really depends on whether the cash flow can support it or not and whether the business shrinks you still feel you can support the transaction. Again, happy to take a dive into it. You can reach me here or directly at redacted
commentor profile
Reply by a searcher
from University of Virginia in Washington, DC, USA
Thank you all for the advice. In the end, I decided to walk away from the deal because several of the benefits that allowed the seller to achieve the current performance will not transfer after the sale, with the top client being just one example. Additionally, the seller was unwilling to adjust the terms or price.
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