What multiple penalty would you place on HIGHLY concentrated revenue??
April 17, 2023
by a searcher from United States Military Academy in Haddonfield, NJ, USA
Hello Searchers, Investors, and Bankers,
I have an interesting one for the group: how much would you decrease the multiple offered on a seller's EBITDA s due to customer concentration?
I am speaking with the owner of a precision sheet metal manufacturer who otherwise hits all the prime search fund metrics except one. 75% of revenue and profit come from only one customer. It is a long-term customer...but there are no long-term contracts in place. Just the relationship between the owner and buyer.
EBIDTA looks like this###-###-#### : $.545m, $1.05m, $1.7m, and $1,5m respectively. He very much benefited from supporting the COVID push for the warehouse automation boom. That is slowing (driven by Amazon). My bet is unless new customers are brought on the business is likely going back to sub $1m for 2023.
For each of those years, one customer is responsible for 65-75% of the business revenue and is equally profitable to the remaining customers.
My message to him is that high concentration induces a large risk for a buyer and as such I'd likely discount the EBITDA generated from that single customer by up to 50%.
50% too high, too low?
For instance, I could say something like I'll give you 3x on the 25% customer stack, but only 1.5x or less on rev/profit from that single big customer.
Curious to hear your thoughts.
Thank you very much,
Bryan
from United States Military Academy in Haddonfield, NJ, USA
A quick follow up with some details in case you are curious.
Owner is 63 and ready to retire. He came back from a full month of vacation and told me he was done. Ready to pass the biz along and move full time to FL. No adult children want into the biz and he is the sole shareholder of the company. His father founded it 60 years ago. Trained and independent foreman runs day to day ops. Owner takes care of bidding new-new work if the inside sales/admin can't. Says they've never had a full time sales person. Never needed one as local reputation keeps the phone ringing.
The company is 30 minutes at rush hour from my home town and I can't move (taking care of elderly parents).
My idea is to transition the company away from being reliant on the warehousing business and get it supporting defense contracts. Spent the last decade selling LRUs (line replaceable unit) to major defense primes. Each "black box" that a contractor sells starts with...a metal box. Owner says they used to produce parts for Lockheed years ago.
Several of you were wise to point out the danger of wasting time on a deal like this. I appreciate the grounding perspective. I really want this to work for so many reasons that it is easy to explain away all the negatives/risks with rosy assumptions and hope.
from Rutgers, The State University of New Jersey in Tampa, FL, USA
Additionally, requesting a more substantial equity role from the seller could significantly improve your downside protection, provided they have the relationship with the customer. To offer the seller greater flexibility, a "put" option could be included, allowing them to exercise some equity in the future and reduce their investment after assisting with diversifying the customer base. Moreover, as Mike pointed out, diversifying the revenue stream should also be a priority, as this would yield immediate benefits and reduce risk. Good Luck!