Standby Note to Mitigate Customer Concentration

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September 11, 2024

by a searcher in San Francisco, CA, USA

I'm looking at a company with the following customer concentration:

Customer A) 21%
Customer B) 8%
Customer C) 7%

The company has monthly contracts, and the customers are fairly loyal to the owner, posing a risk of churn upon transition.

The sellers don't want a contingent or forgivable note; thoughts on having one on a 2-year stand-by to mitigate the risk? The idea would be that if the top customer churns, I'll have the runway to make up revenue before the note comes due.

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Reply by a searcher
from Dartmouth College in Boston Metropolitan Area, USA
agree that forgivable seller note related to top client is realistic ask and helps mitigate risk. have you included a non-compete / non-solicitation with the seller that is enforceable?

another tactic is to significantly increase the size of the note on 2 year standby, make it so big that seller prefers a contingent note on a smaller amount.


Depending on the nature of the business, you might also validate as best you can the contribution margin on these clients and have seller offer these top customers a reasoanble discount to sign an annual or 2 year contract
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Reply by an intermediary
from Rutgers in Cherry Hill, NJ, USA
Coincidentally, today, Nick Molina shared what he did in a similar situation: "I’m dealing with this right now in a large properly mgt business I’m getting ready to close on. I am mitigating that risk by having a 20% seller note that is forgivable based on client attrition in tranches up to 75% forgivability. During the 2 year forgivability period, I will be focused on establishing my own relationship with the clients." Thought this would be something that could work well for you too. Wish I knew how to tag Nick the way Luke tags us.
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