How to build an offer that hedges against heavy customer concentration?

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June 18, 2024

by a searcher from University of Florida - Warrington College of Business Administration in Melbourne, FL, USA

Looking to get some ideas for a creative way to structure a deal where one customer accounts for more than 50% of revenue either through a combination of forgivable seller note, buyer rebate, or any other creative and SBA friendly structure.

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Reply by a professional
from University of Notre Dame in New York, NY, USA
There’s a few ways to address customer concentration - Brad and Brian are correct that a forgiveable seller note is the most common SBA friendly structure, but you can also try to utilize more than one of the below options:

1. Seller note- As mentioned above, a forgivable seller note could also incentivize a seller to assist the new owner with securing/retaining existing customer revenues since the seller won’t be paid in full unless the company can maintain its business performance.

2. Partial Buyout - Incentivizes the Seller to help retain the largest customer contracts because they'll still have "skin in the game" and will want to hold on to the business upside. Also allows you to have unlimited duration consulting agreements under the new SBA rules (see below).

3. Post-Close Consulting Agreement - Occasionally the Seller would be willing to take a reduced purchase price (or "move around the economics") if you offer a post-closing consulting agreement whereby the Seller would get paid out a commission for certain revenue milestones being hit. This isn't an earn-out since it's not part of the purchase price and can be tied to performance under important customer contracts. It keeps the Seller engaged with economics tied to the retention of customer revenue. Note that if the Seller isn’t retaining equity in the deal the max length here can be 1 year; if you do a partial buyout (even if you only leave the Seller with 5%) you have an unlimited duration. So in theory could structure the consulting agreement like a 5 year earnout and get better terms on your SBA loan since it technically wouldn’t be part of the purchase price.



I do deals of all sizes with bespoke structures. Happy to dig in a bit more- feel free to DM me or shoot me an email redacted
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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
We would be happy to take a look at the transaction and see if we can help you come up with a creative structure. You can reach me here or directly at redacted I think the key is going to be seller notes with some forgiveness to them.
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