You have worked for many years, increasing your company’s revenue, managing your expenses and building a solid reputation with your customer base and now it is time for you to retire or move on. Time to receive the reward of your hard work by selling your business.
Once you have your business for sale, your business income statements are the first things potential buyers will review. After buyers review and are interested, one of the first questions they will ask is, “What is the composition of your customer base?” This is an important question to the buyer as it indicates one of the greatest sources of risk to a new owner. Your customers have been loyal to you in the past, but would they continue to be so loyal with a new owner? Some important common sense questions about your customers any potential buyer will want to know are:
What percentage of your revenue do your top 5 customers represent?
Are there existing contracts with your customers?
Is the business owner the key contact with the customer?
What industries are the top customers in?
If your top one or two customers represent more than 50% of your revenue, this will be a large perceived risk by any potential buyer. Losing just one of the top customers will mean a significant drop in revenue. The only way to prevent or overcome this issue is to work diligently to expand your overall customer base and sales within each customer.
Most private businesses do not have long term contracts with customers. Buyers do not typically expect contracts, it except within certain industries, but it does help. One year contracts or good but do not significantly reduce long term risk.
In many privately held businesses, the business owner is the key contact with major clients. Once that owner is no longer part of the business, there is the potential that many of the top customers will cease doing business with that company. To avoid this issue, transition the account responsibility to other employees within the business. Have those key employees manage the customer as the key contact and relationship between the client and your company, removing yourself from the primary relationship.
If your customer base is predominantly in one industry or one segment within a larger industry, it would be wise to diversify your base. Business buyers are wary of too much dependence within an industry. For instance, if your business only serves recreation vehicle manufacturers, a down turn in the RV market will result in a downturn in your business as well.
Each of these questions are good common sense business questions that most entrepreneurs thought of when starting their business. Over the years of doing business and especially when times are good, it can be easy to get complacent and neglect managing your client base. When planning for your business succession and maximizing your business value, these questions need to be readdressed prior to the sale of your company.