Multiple Discount for >50% Customer Concentration?

October 19, 2024

by a searcher in Toronto, ON, Canada

I'm looking at a business where the top customer is almost half of revenue and the next three customers make up 40%. All the customer relationships are 10+ year relationships so the seller believes they will stay. Besides a forgivable seller note, are there any other structures that anyone can recommend? What would be the right multiple discount if there isn't a seller's note available?

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Reply by a searcher
from University of Pennsylvania in Philadelphia, PA, USA

Given there are only 4 customers that drive the entirety of the business, I would try to finance almost exclusively with earn-outs tied to the gross profit from those 4 customers, with some marginal consideration up front. Would also make sure that it has a long duration, such that you don’t generate business with the customers for only 1 additional year, pay the founder, and then they immediately leave. If you get creative here, you can effectively finance these earnouts via cash flow that the customers generate, making it quite attractive from a financing perspective. DM for questions.

Reply by a searcher
from Northwestern University in Chicago, IL, USA

I'm leaning towards the typical MBA answer, it depends lol. I actually am looking at a company that is similar. I would look at 1. contract or PO based, 2. number of competitors or you are the sole supplier, 3. time takes for competitor to get qualified (eg, spec'ed in for auto or FDA can take a while), 4. is the part/service the seller supplies accounting for a large portion of the customers'' end product cost. and how comfortable you are with the industry. Happy to chat more in detail if you need a sounding board.

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