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,