Valuation Feedback

March 13, 2024

by a searcher from Oklahoma State University in Stillwater, OK, USA

I have my own thoughts on this, but would like some varying opinions.

Manufacturing Company
$12mm revenue
$2mm EBITDA
$500k cash
$750k AR
$2mm hard assets
included in sale

Great facilities.
Great culture/team.
Great equipment.

Kicker - largest customer is 65% of revenue.

How are you attacking this deal? Valuation and structure.

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Customer concentrations in and of themself do not immediately doom a deal. However, there are a number of things to consider when it comes to customer concentrations. I usually recommend understanding the following: 1) How long as that business been a customer of the company? The longer the more likely they are to stay a customer. 2) How many items does the business produce for that customer? The more items produced the stickier the customer is likely to be. 3) What does the competition look like in the market for other potential suppliers to that customer? Is there a lot of competition? What does pricing look like from that competition? 4) How easy is it to move that customers business to another operator and is there a cost to do so? And do you need special licensing or knowledge to manufacture that product or molds, making it harder to move the product. 5) How important is this product to that customers overall operation? Is it product likely to stick around and continue to be needed going forward, or is it something that might eventually go away. 6) Lastly, who at the company manages that customer's relationship and how contingent is it upon the seller remaining for that customer to stay. This can be the hardest issue to figure out, but sometimes there are lifetime relationships between customers and sellers that can pose a significant risk. The more of these items you can get comfortable with, the less risk there will be, and the easier it will be to convince lenders and investors the risk is not a concern. I hope this helps. Happy to have a discussion and help you assess the deal from a lending standpoint. You can reach me here or directly at redacted Good luck!

Reply by a searcher
from Kennesaw State University in Atlanta, GA, USA

^redacted‌I'd do a valuation assuming you had the customer concentration that you'd prefer ("if the customer concentration was exactly what you the buyer wanted to see, what would I pay for this business?" is the question). Once you have that value, you'd then offset customer concentration risks in some way. Lowering the value of the biz upfront might be a tough pill for the seller to swallow but baking in the risks somewhere else in the deal might be easier for the seller to deal with. To reduce risks, have a clause stating if revenues from top X customers drop by Y% over the course of Z years, the seller note gets reduced by some amount. Or, have an amount set aside in escrow that doesn't get paid to the seller if the top customer relationships changes in some way. You could also add in an incentive. If the seller brings in additional customers offsetting concentration risks, increasing revs, etc. they get $ additional in payouts over x years (or something).

Just a few ideas. Sounds like an exciting deal, though. Happy to be helpful if I can. Best of luck!

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