M&A Offering Document: Recurring Revenue and Customer Concentration
Recurring revenue is always a plus for a company, and Sellers are wise to mention the amount of recurring revenue in the M&A offering document because it may increase Buyer interest and therefore the offer price.
Another metric, customer concentration, is the opposite of recurring revenue. If a company has highly concentrated sales (large amounts of sales with one customer or a small number of customers), Buyers may be less inclined to pursue a deal or offer a high price.
Customer concentration is a bit of a slippery eel to grasp and define, but generally speaking, if a single customer accounts for more than 20 percent of revenue, or if a small number of customers (three to five) accounts for more than 50 percent of revenue, the company may have a customer concentration issue.
If Seller doesn’t have a concentration issue, that’s a key selling point definitely worth mentioning, if not touting, in the offering document. If Buyer cannot ascertain any customer concentration issues (after reading the offering document), Buyer should make a point to ask Seller about customer concentration during a follow-up phone call or e-mail.
If you do have a customer-concentration issue, try to mitigate that issue. For example, if a single customer accounts for 40 percent of revenues but is a large, multinational conglomerate with multiple decision-makers in multiple offices, point out this distinction to Buyer.
In this example, you can argue that 40 percent of revenue is not under the control of a single decision-maker, thus mitigating some of the risk of the concentration.