4 Ways to Eliminate Customer Concentration and Build Confidence with Prospective Buyers
It’s value suicide. A company with more than 15 percent of its revenue with one customer is at high risk of having the rug pulled out from under them.
As the owner of such company, it’s going to add difficulty when it comes time to sell. And for any potential buyer, the risk is higher unless you can prove growth potential by finding more like customers, and fast.
If you are preparing your business for sale, you need to start to think like a buyer. If you have customer concentration issues, stop looking at the business as the operator and start looking at it from an opportunity and sustainability standpoint—especially under new ownership. Remove yourself, your history and past knowledge from the business, because that is exactly what a buyer is going to get.
There’s no doubt that you worked hard at building long-lasting customer relationships, especially with a major client. But in selling your business, it’s a red flag. It’s risky. That client could leave shortly after you are gone. The buyer will always be fully aware of such risk and there’s no hiding it.
Here are some ideas on how to minimize that risk for the potential buyer and better position your business for a premium value:
Remove the Client Trap
You aren’t alone, a lot of business owners fall into this trap. It’s easier to please and upsell existing clients than it is to look for new business. Start looking for “like clients”. Every good client is a profile for another new client. Same size, same problems or same needs, figure out the key component and start looking for a new client that mimics your cash cow.
Ask for Referrals
Happy clients are also happy to refer you to others. It’s the entire basis of the Net Promoter Score and why so many companies are using it not only to improve customer service but to prove viability of the business. If you don’t ask for referrals, you won’t get them. Stop by or give your best customer a courtesy call, let them know you are looking to grow your business and ask if they know of any other business that could utilize your services. If not now, ask them to keep you in mind. In some cases, businesses offer a referral fee. This may or may not work for you, but it’s another option to reward the referring party.
Seal the Deal in Writing
When you have a customer or client who is a significant portion of revenue, get the deal in writing including the duration of the agreement. Although contracts can be nullified post-transaction, at least the contract minimizes the risk of them leaving and gives the new owner some peace of mind.
Remove Sole Dependency
Many times in key accounts like this, the customer has become dependent on you. They want to only work with you or negotiate with you. Start to transition this responsibility with another team member now, even if you aren’t looking to sell right away. The customer needs to transfer their confidence from you to the business. This will add even more assurance to the prospective buyer.
Minimizing risk is the number one thing you can do before listing your business on the market. The less risk there is, you can sell for more and sell faster. Customer concentration is just one area to reduce that risk. Keep reading our blog as we go through other areas to increase the salability of your company.
Mr. Elliott is Managing Director of Sunbelt Texas Business Sales & Acquisitions with more than 20 years experience in mergers, acquisitions and business broker. Mr. Elliott purchased Sunbelt Houston in 1996 and has managed the sale of over 500 companies from very small businesses to companies with revenue of more than $30,000,000. Mr. Elliot has provided Business Broker and merger and acquisition adviser services to privately held business in Houston, Austin, San Antonio and throughout Texas.
Over a 20 year career, he has handled a wide range of industries including manufacturing, distribution, medical, machining, construction, and contractors. Mr. Elliott has completed transactions with Private Equity Groups, strategic buyers and a wide range of regional companies executed plans to grow through acquisitions.
Mr. Elliott has been recognized as a “Thought Leader” by Sunbelt Business Brokers Global Network. Mr. Elliott is frequently interviewed in various media and is considered an expert in the field of buying and selling privately held businesses.
Mr. Elliott has received the professional designations of Certified Business Intermediary (CBI) and Master Merger & Acquisitions Intermediary (MMAI).