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Fixing Customer Concentration Before You List

Few things scare a buyer more than a company that lives on one customer, and Dallas Business Brokers Firm sees it come up in diligence again and again.

You can start fixing it years ahead.

Rather talk first? Call (214) 555-0172 on a weekday.

The short version

  1. If your top one to three customers pass about 15 to 20 percent of sales, expect a price cut or a walk away.
  2. Buyers look back three to five years of revenue.
  3. Contracts, longer terms and more mid sized customers lower the risk.
  4. Owner dependent relationships get the same discount.

The buyer's math

Buyers ask what happens if the biggest customer leaves. If the top few customers make up more than about 15 to 20 percent of revenue, many buyers cut their offer by about that share, or walk away.

A company that depends on a single contract can become unsellable the day that customer is acquired or changes vendors.

Why you cannot fix it overnight

Buyers study three to five years of revenue history. A new contract signed three months before listing does not prove the company can bring in customers on its own.

That is why the work starts early, in the years before you plan to sell.

Steps that help

  • Set a goal for the share of revenue any one customer can hold
  • Spend sales time on new mid sized customers, not only the biggest
  • Offer longer term agreements, with renewal terms in writing
  • Check which agreements need consent to pass to a new owner
  • Track revenue and margin by customer so you can show the picture

When the concentration is not what it looks like

Some large accounts are several independent buyers under one umbrella. A property management group, for instance, may place work for dozens of separate owners. Show that, so a buyer sees the real spread.

Relationships tied to you

Revenue that follows the owner personally gets the same discount, because it may not transfer. Introduce a second person to key accounts and document what each customer needs.

Signs buyers look for

Buyers like customers who found you from different sources and who have bought for years. They like clear contract terms and a sales process that does not depend on one person.

They also look at customers' own health. A large account in a shaky industry is a bigger risk than one in a steady industry.

If you cannot fix it in time

Deals can bridge the risk. A seller may stay on for a period, or part of the price may depend on keeping the key customer. That moves risk back to you, so weigh it with your attorney.

Read how staff and handoff terms work in transition time and noncompete terms. When you are ready, request a private price range.

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