Light manufacturing · Customer concentration found late
One customer, 41% of revenue: the deal a buyer walked away from
A profitable machine shop with one dominant customer. The buyer learned that customer was moving work in-house five weeks into diligence, after most of the money was spent.
- Asking price
- $2M–$2.5M
- Outcome
- Buyer walked away
Illustrative composite. This breakdown combines patterns that come up again and again in small-business acquisitions into one fictional deal. The business, the people, the location and every figure are invented. It is not a real transaction, and any resemblance to a specific deal is coincidental.
Test the risk that can kill the deal first and cheaply. Expensive diligence comes after the cheap kill tests pass, not before.
The deal
A precision machine shop doing about $4.2M in revenue and $700k of SDE, asking $2.4M. Long-tenured machinists, well-maintained equipment, and clean books. The CIM disclosed that the top five customers made up 62% of revenue but didn’t break that down further.
The buyer negotiated to $2.3M, signed an LOI with 60 days of exclusivity, and started everything at once: the QoE engagement, attorney review of the draft purchase agreement, and the lender’s underwriting package.
What surfaced in diligence
The customer-level revenue report arrived in week three. One equipment maker accounted for 41% of revenue on rolling purchase orders, with no supply agreement. With the seller’s permission, the buyer spoke with that customer’s purchasing lead in week five and heard the thing no CIM will tell you: the customer was qualifying a second supplier and planned to bring its highest-volume parts in-house the following year.
Nobody had lied. The seller knew the relationship was “being reviewed” but believed, reasonably, that 15 years of good service would carry it. The buyer’s lender took a harder view.
The numbers
As presented, the deal financed comfortably. At $2.3M plus closing costs and working capital, total project cost was about $2.52M: a $252k injection and a loan carrying roughly $367k a year in debt service. With $700k of SDE less a $120k plant-manager salary, coverage was about 1.58x.
Then the stress test. If the shop lost the anchor customer’s revenue, about $1.7M, and the work it dropped carried a contribution margin of roughly 35%, SDE would fall by about $600k. What was left wouldn’t cover a manager’s salary, let alone the loan. No price the seller would accept made that risk financeable, and SBA 7(a) acquisitions can’t be bridged with an earnout that pays the seller only if the customer stays.
| Line | LOI price, as presented |
|---|---|
| Purchase price | $2.3M |
| Total project cost | $2.52M |
| Equity injection (10%) | $252k |
| SBA loan | $2.27M |
| Annual debt service | $367k |
| SDE underwritten | $700k |
| Less market salary | $120k |
| Cash flow for debt service | $580k |
| DSCR | 1.58x |
Figures are rounded and illustrative. Loan math assumes a 10-year SBA 7(a) term at about 10.5% interest, and cash flow for debt service is SDE minus a market salary for whoever runs the business.
What the buyer did
The buyer proposed a lower price with a larger seller note on full standby, so the seller would share the risk. The seller declined, reasonably from his side, and the buyer walked away before the exclusivity period ran out.
The cost was the QoE fee, most of the legal bill and five weeks of exclusivity. The buyer’s takeaway was about sequencing rather than bad luck: the customer breakdown and a customer conversation cost almost nothing and could have come first, before the LOI or right after it, with the QoE engaged only once concentration was understood.
Lessons
- Ask for revenue by customer before the LOI. A top-five figure isn’t enough.
- Sequence diligence: cheap kill tests (customer breakdown, customer conversations, lease, licenses) before the QoE and legal spend.
- A dominant customer on purchase orders, with no contract, is a risk lenders discount heavily.
Light-manufacturing checks
A starting checklist for any deal in this sector, alongside the general diligence list.
- Revenue by customer for three years, and whether each top customer buys under a supply agreement or on purchase orders.
- Whether any major customer is dual-sourcing, insourcing, or re-bidding work.
- Equipment list with age, condition and maintenance records, plus the capex the next five years will need.
- Certifications the work depends on (e.g. quality-system certifications) and whether they survive the ownership change.
- Who holds the programming and quoting knowledge, and whether they’re staying.
Practice it in the simulator
Work a fictional sample deal built around the same lesson, make the call, then compare your judgment with an experienced buyer’s. Opens in the app.
Ridgeview Precision Machining (customer concentration)Read more
Next case study: A lease shorter than the loan, and an owner who was the shop
This guide is for informational and educational purposes only. It does not constitute legal, tax, financial, investment, or lending advice, and is not a substitute for advice from a qualified attorney, accountant, lender, or other licensed professional.