How to mitigate customer concentration?

by a searcher from Columbia University - Columbia Business School

5 months ago

Hi all,
Looking at an otherwise great deal that has ~50% concentration in 1 customer. Need some advice on dealing with it. I'm most likely going with SBA debt so a true earnout isn't likely (but feel free to convince me otherwise).
Options I'm considering:
big forgivable seller note 20-30% (usually the max I've seen sellers entertain, but may still go bankrupt if lose big customer)
huge forgivable seller note 50-60% (sized for DSCR of 1x in event of losing the big customer)
if not bankable, attempt all seller financing
How else can I mitigate?
Can I ask to approach the big customer as part of the closing contingencies? 
Would seller rolling equity help?
Any creative ideas would be much appreciated.

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searcher from Massachusetts Institute of Technology - MIT Sloan School of Management

In a project environment, many times the single customer by name operates as a federation of projects. Each has its own management, its own decision processes, and often its own end customers, all with very different needs. Here the supplier is often integral to the success of the project.. It makes it difficult for the buying organization (really multiple buying projects) to terminate the supplier en masse without a larger driving rationale to terminate.

3 weeks ago | like reply | 0 likes

intermediary from Rutgers-The State University of New Jersey-Camden - Rutgers School of Business

I caught in your comment that you could go bankrupt if you lose that one customer. So you should consider ways to mitigate the actual risks to you as the new owner of the business. Can you grow the customer base quickly enough to make the lack of customer diversification a low risk concern for you? As for financing it, you can shop it until you find a lender that is comfortable with it. Obviously, there are many more details that need to be filled in here but that is my short answer.

5 months ago | like reply | 0 likes

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