A prospective buyer wants to penalize our overall EBITDA multiple because our top customer generates thirty percent of our revenue, even though that customer has been with us for ten years under annual renewals. How can we structure the deal to isolate that customer risk without accepting a discount on the entire business?

Question

Tyler Smith · Accepted Answer

Buyers discount businesses with heavy customer concentration because their senior lenders will not leverage revenue exposed to single-account loss. If your top account represents thirty percent of revenue, the buyer may refuse to pay a full multiple on that specific earnings stream. Instead of accepting a blanket discount across your entire EBITDA, you can bifurcate the valuation through deal structure.

Structure the base business at a market multiple for the seventy percent diversified earnings, paid in cash at close. For the earnings derived from the thirty percent concentrated account, create a contingent seller note or separate synthetic equity class tied strictly to gross margin generated by that customer over a thirty-six month period. If the account renews and maintains historical gross profit, the note amortizes on schedule, yielding your full target price. If the customer leaves or downsizes through no fault of the buyer, the principal balance adjusts downward based on a clear contractual formula.

To protect yourself, make sure the agreement specifies service-level commitments the buyer must maintain for this customer. If the buyer degrades operational quality, alters pricing terms, or loses the account due to operational failure, the note should immediately accelerate and become payable in full. By isolating the concentrated revenue, you remove the lender's risk while keeping the unencumbered portion of your enterprise value at full price.