As a general rule, no one customer should account for more than 20 to 25 percent of your company revenue. While having large customers can be good for your bottom line, it introduces risk to the next owner.
As you build your business, pay attention to what a future buyer will want. They’re looking for well-diversified customer groups where the loss of one account won’t have a devastating impact. Do the hard work of diversifying, and you’ll increase your future business value.
But, if you’re ready to sell now, and customer concentration issues are what they are, you need to prove those top customer relationships are strong. Help buyers understand why your company is at little risk of losing those key accounts:
Multiple touchpoints. You hold several relationships inside the customer organization, working with more than one decision maker, influencer, and day-to-day contact.
Similarly, more than one person in your organization works with these top client contacts. So even if a key employee leaves, you’d still maintain a customer relationship at some level. The customer’s business is not tied to you (the owner) or one main salesperson.
Multiple divisions. You work with several customer facilities or divisions that place individual orders. Each division has a separate, independent purchasing agent.
Pain points. A disruption in your relationship would cause a disruption in the customer’s business. Your relationship is “sticky” because you provide mission critical products or services that the customer can’t readily replace. The customer would have some measure of pain if they left.
Tenure. You’ve had a long-term relationship with the customer. Better yet, your customer contact has changed multiple times over the years, and the account is still going strong. Your history goes something like this: “Jane got promoted, John retired, we’re working with our third purchasing agent in 15 years and nothing has changed between our firms.”
That said, no matter how well you justify the strength of an overly-large customer relationship, buyers will look to guard their investment. They may lower the business valuation and may allocate a larger percentage of the purchase to a seller earnout or some alternative financing.
Buyers may also ask that you stay with the business for an extended period of time to help transition those key customer relationships. So, if you have a high level of customer concentration, and diversifying just isn’t in your future, consider putting your business on the market a few years ahead of your ideal exit date.
And, if you’re the main point of contact for those relationships, spend some time coaching someone in your organization. Transfer relationships to your internal team to increase the likelihood your business will retain those customers after a sale.