Home services company with big box retailer relationship

September 22, 2023

by an investor from Columbia University - Columbia Business School in Seattle, WA, USA

I'm looking at a home services business that has 45% of the revenue coming as a preferred installation vendor for one of the largest, very well known national big box retailer (the rest of the business is mix of commercial and direct retail). The business is solid otherwise, but this dependency is worrying me a bit. It is a well established relationship (10 years and counting). I think it should be fairly straightforward to grow the direct business to mitigate the risk, but 45% is still a big number so would like to understand the dynamic here better.

Anyone here in a similar situation where you own/operate a business with significant portion of revenue coming from a big box retailer?

Thanks!

Reply by a searcher
in Toronto, ON, Canada

As a general rule of principl I would steer clear of any businesses that has 45% of revenue coming from 1 customer. Unless that customer is the government and you have long term contracts in place mitigating your downside. As an investor, I would be hesitant to put money into any deal where nearly 50% of the business revenue is represented by 1 customer for the simple reason that if you loose that customer your business would take a nasty haircut. You are giving that customer a lot of power. That customer may begin to play hardball pushing out payments 120 days or longer which will dramatically affect your bottom line. There are many businesses for sale in your space I would keep looking for businesses that have more diverse revenue streams. If you decide to do this deal then I would do a significant portion of this deal as a seller finance vendor take back. Bottom line this sounds to be a bad business to acquire. I would not buy this busines.

Reply by a searcher
from INSEAD in France

Ask why the relationship has been ongoing, if the big box retailer is the current owner's best friend from college you may have a bigger problem than customer concentration once you acquire!

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