Is Customer Concentration a Deal Killer?

The biggest transactional challenge in B2B M&A

Happy new year!

Thanks for joining us for the first Atlasview Insights of 2023. We’re looking forward to sharing a ton of content for small business owners, deal makers, and investors this year.

If you are not familiar with Atlasview Equity, we are a private equity firm specializing in software and tech-enabled businesses. You can learn more about our team and investment criteria: here.

In this newsletter, we cover: 

• Private equity outlook for 2023

• Why customer concentration is a deal killer

• A few of our favorite reads from the past few weeks

Make sure to subscribe and if you enjoy the content, we'd appreciate you sharing it with a colleague.

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Let’s Get In Touch

We look for the following characteristics in our partner companies:

• Industry: Software and tech-enabled businesses

• Business Profile: Sticky B2B customer base

• Size: Minimum $1m EBITDA or $5m ARR

• Geography: The US & Canada

Whether you’re a business owner interested in working with us, or an intermediary with a deal to share, always feel free to reach out and get in touch with us!

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2023 US Private Equity Outlook

Earlier this week, Pitchbook released its annual US PE outlook report. A few outlooks worth noting:

Outlook: PE-led take-privates will migrate to the middle markets.

The rationale behind this is that out of the 952 public listings (approx $2.6T in inception value) that spawned from the two-tear take public frenzy, 644 now have market caps below $1B.

Going forward, these companies will likely populate the ranks of take-privates, and the buyout pendulum will likely swing back in favor of the middle-market segment.

Outlook: Sponsor-to-sponsor exits will take up a record portion of US PE exits.

Given that the number of PE firms has steadily expanded over the years with increasing amounts of dry powder, firms will need to deploy this capital somewhere. On the other hand, the number of corporate buyers has remained relatively fixed and these buyers are likely to be more hesitant to make acquisitions given the macro headwinds.

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Atlasview Perspectives: Deal Killers in B2B M&A

Our team has analyzed hundreds of B2B software deals. It’s become quite clear that customer concentration is one of, if not the most, common deal killer in B2B M&A transactions. So what does “customer concentration” really mean?

• A significant percentage of a business’s revenue is generated by a limited number of customers or channel partners

or

• A business’s key revenue streams are largely dependent on the current owners/management teams’ relationships

So as a buyer how can you manage this risk? One common way is an earn-out that is dependent on customer retention.

Another option…

Jay Vasantharajah @jayvas

An example deal I heard from a lender: Acquirer negotiates a lengthy LOI (180 days IIRC) w/ a biz that has significant customer concentration. Within that time, acquirer scrambled to get a competitor under LOI. Succeeded & the 2 combined businesses had little concentration.

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Our Favorite Reads

Creating a Productive Board Meeting

Thomas Ince @thomasince

If you're in the SMB sphere or Micro PE, John Huhn is an interesting guy to track Over the past few years he has: Purchased 100 companies doing over 1 Billion. Built and sold a company for 825M to ADP And prior to that, was a corporate executive in 2017 Overview👇🧵

Constellation's Spin-Out of the Lumine Group

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Thanks for tuning in to another edition of Atlasview Insights. We’ll be posting bit-sized content every Wednesday with longer-form pieces going out on a bi-weekly/monthly basis. We have a ton of content lined up for small business owners, deal makers, and investors.

Make sure you subscribe and share with anyone that may be interested.

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Atlasview Equity is a private equity firm specializing in software and tech-enabled businesses. We combine patient capital with proven operational strategies to deliver predictable results for our stakeholders.