For the foreseeable future once a month this memo will be on a topic to increase value in a business, which is exactly what business owners should want and is definitely what business buyers are looking for.
I’ll start with one I’ve seen a lot of lately, customer concentration. Here are three examples:
- Seventy percent of sales to one customer.
- Seventy-five percent to three customers.
- Eighty percent to three customers (one being a middleman buying for their clients).
This should scare owners, but usually they feel their relationship is so tight all is okay. To a buyer, with acquisition debt payments, it scares the bejeebers out of them. To spin this around, I’ll repeat something I wrote about years ago because vendor concentration can be as deadly as customer concentration. A past client had about 70% of his sales from one vendor, he lost the line, built up his business, and again was with one vendor at 65%. Lost that vendor when the vendor’s competitor took sales in-house and his vendor went to my past client’s larger competitor.
This stuff happens, all the time. It’s not make-believe or fantasyland. I talked to an owner recently who lost his top customer. Why? Because his salespeople (I’m using the term loosely) made contact once a year. The rest of the year they took orders and cashed commission checks.
So, what happens when it’s time to sell? One recent deal had a price 30% of what it would have been three to five years ago, which was before the top customer changed focus and sales reduced significantly. One of the examples above is a company close to selling and the facts include:
- The price is 50-60% of what it would be if there was no customer above 10% of sales.
- There’s a claw back provision for 20% of the price (if sales drop below certain levels).
- The seller has to stay for (at least) one year to maintain the relationship.
So much for exiting with style, grace, and more money.
The real problem is no matter how often their CPA, banker, consultant, and M&A professional tell them to fix this problem the owner is “fat, dumb, and happy” riding the top-customer wave. It’s why the Wall Street Journal published statistics showing 90% of small to mid-sized businesses are not ready to sell for maximum value.
“There is more stupidity than hydrogen in the universe, and it has a longer shelf life.” Frank Zappa