Anonymised, illustrative composite. A single national account carried more than half the business's revenue on a contract that renewed year to year with no long-term commitment behind it — and the lender priced that risk into what it would lend against.
At a glance
A contract-manufacturing supplier reported seller's discretionary earnings of $520,000 on a business built largely around one national account. That single customer represented 60% of revenue, and the same proportion applied roughly evenly across the earnings base, putting about $312,000 of the reported $520,000 in SDE inside that one relationship. See the seller's discretionary earnings glossary entry for how that figure is ordinarily built before a lender starts adjusting it.
The customer relationship itself was healthy — six years of continuous business, on-time payment, growing order volumes — but it ran entirely on purchase orders renewed annually at the customer's discretion, with no multi-year supply agreement, minimum-volume commitment or exclusivity clause of any kind behind it. From the lender's side of the table, that meant more than half the earnings supporting the loan could, in principle, disappear inside a single annual renewal cycle with no contractual notice period protecting the business at all.
The lender's credit committee did not disqualify the concentrated revenue outright; it discounted it in the serviceable-debt calculation. On this file, the committee credited only half of the $312,000 in SDE attributable to the concentrated account — $156,000 — while crediting the remaining $208,000 in non-concentrated SDE in full. Underwriting earnings fell to $364,000 from the reported $520,000. Against deavo's published DSCR guidance — a target of at least 1.25x on an SDE basis, the convention it applies to main-street deals of roughly $200,000 to $1,000,000 — that moved maximum serviceable annual debt service from about $416,000 on the full reported figure to about $291,200 on the concentration-adjusted one.
There is no published Canadian standard setting a customer-concentration haircut; this was a credit-committee judgment specific to this file, reached the way lenders generally do — by testing debt service against a more conservative earnings base rather than declining the deal outright. See deavo's financing guidance for the DSCR floor the adjustment was measured against, and, for how the same underwriting base is built before any concentration adjustment is layered on, deavo's valuation guidance on sector SDE multiples. Both pages carry the same guardrail in their own words — the financing page labels its output an “Illustrative estimate only — not a financing offer, pre-approval, or financial, legal or investment advice,” and the valuation page calls its medians “Illustrative medians for research context only — individual businesses vary widely. Not an appraisal.” Neither publishes a concentration haircut at all, and none should be read into either page: the 50% figure here was this lender's own response to this file's facts, not a market rate to expect on the next deal.
The buyer restructured the offer around the concentration-adjusted debt capacity rather than the full reported figure, financing a smaller facility and covering the gap with additional equity. As part of the negotiation, the seller agreed to introduce the buyer to the customer's procurement team well ahead of closing, giving the buyer direct visibility into the relationship's health independent of the seller's own account. For the related file where owner dependence, not customer concentration, drove a similar restructuring, see the founder who was also the only estimator, and for the ratio underlying the adjustment, the debt service coverage ratio glossary entry.
A facility sized against the full $520,000 reported figure would have left the business carrying debt service that only the concentrated customer's continued renewal could support — a single lost purchase-order cycle would have put the loan itself at risk, not just the business's profitability. Sizing the facility against the concentration-adjusted figure instead cost the buyer additional equity at closing; it also meant the business could survive losing the account entirely and still service its debt, which a facility built on the full reported figure could not have promised.
The tell was not the concentration itself — a business built around one strong customer is not automatically a problem — it was the absence of anything contractual behind the relationship. A 60% customer on a signed multi-year agreement with minimum volumes is a different underwriting question than a 60% customer on a year-to-year purchase order. Any diligence review should check not just how concentrated revenue is, but what, if anything, legally obligates the customer to keep buying.
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