Curious to hear how investment professionals evaluate businesses with notable customer concentration. What factors do you consider, and how much can that impact valuation/pricing? How do you bridge the qualitative to the quantitative?
Many thanks in advance!
Run some scenarios of losing cette customer. Are they very profitable? Allocate probabilities and value the company in each scenario. That get‘s you your discount.
In practice, people will reflect it more intuitively
Thank you, this is very helpful
Interested
You can also structure around it. Example: you ascertain that the largest customer contributes 25% of total EBITDA. You say: we'll pay you 75% of the deal value at close (a full multiple on the 75% of EBITDA that you feel good about retaining) and we'll hold back 25% of the deal value for 1-2 years that will be contingent on retaining said customer.
Then you can run the math: if we keep this customer for the first year, we will have recouped X% of our total purchase price and if we lost the customer after a year, we would be in the deal for an [ ]x effective multiple, can I live with that, etc.?
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