Tuesday, 18 September 2012
What about that Big Customer
Many companies have a single customer or a few large customers that dominate their overall sales. After all, nobody wants to turn down business! But when it comes time to selling the company, this becomes a huge problem.
Revenues could drop! Many buyers won’t look at a business whose revenues could drop dramatically after closing from the possible loss of those customers. Imagine the impact on a small manufacturer if 30% of their sales volume was moved to their competitor. While variable costs may mitigate the short term hit, fixed cost will inevitably cripple most companies. And, most importantly in the buyer’s eyes, cash flows can be dramatically reduced and in some cases eliminated.
Seller’s relationship with key customers. In many cases those large customer relationships are as a result of the owner’s involvement. They are typically long standing customers or were acquired as a result of the owner’s involvement in the sales pitch, the product production, the service provided or all of the above. Regardless, in the customer’s eyes, not only did they buy from the company they bought from the company because of the owner. Transferring a business like this requires a buyer willing to accept these risks and typically a more lengthy transition period in order to re-establish a relationship with the new owner.
Buyer’s look for discounts. The risks associated with stepping into the owner shoes will dramatically affect its value. Business value is based on its cash flows and a multiplier. A business multiplier is borne from the principles of risk and return. The riskier the venture the higher rate of return expected from the buyer. Since cash flow is established at a fixed historical average or a forecasted expected return, the way to realize a greater return is by paying less for the investment in the beginning. Business owners with customers that represent greater than 20% of their overall sales revenue typically see downward pressure on value.
Somehow, some way, business owners have to find a way to diversify their customer base before they ever decide to sell their business. Finding predictable, repeat and diversified customers will not only improve bottom-line profitability, it will also ensure business owners will maximize their value when it’s time to sell.
Do you have a small business question you would like answered about this article or others?
Bill Sivell is a salesperson with VR Windsor Inc. [www.vrwindsor.com] 519-903-7807, which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. His blog appears every Tuesday.