How I Power My Ideas: Step 24. Customers and Something else

Customers are those people who drive your sales ;) It's very important for you and your team (if exists) to be different, creative, smart and customer oriented. Remember: no customers, no sales! Your customer is the one and only individual that can tell you how well you are doing. Not by growth charts and sales figures. But by telling you exactly how it feels to be in the position of a buying customer.

Customer base is a valuable company asset and a well formed one is the asset that helps you grow, improve and develop.

Understand your Customer Base

Here are a few things to understand about your customer base and of interest to potential buyers:

A quick insight into the diversity of your customer base is to run a "gross-revenue-by-customer-report-by-year." It will show you the percentage of total revenue each of your customers generate year by year.

Customer databases contain valuable information that a potential buyer can use as a source of competitive advantage. It has potential to generate future earnings for a new owner and may add significant value.

What industry sectors do you serve?

What geographical area do you serve? Are your customers mostly local, regional, international?

Pay attention to your accounts receivable and aging report because this will indicate if your customers are facing cash flow issues.

"Too Many Eggs in one Basket"
Just as a business enjoys value-drivers, it may also suffer from value-detractors, one of which is customer concentration. Many small businesses have customer concentration issues, which must be addressed in order to sell the business.

Buyers are typically concerned when an individual customer accounts for more than 10 percent of the overall revenue. It is important to appreciate this concern from the perspective of a potential buyer. This insight can help identify creative deal structures that mitigate the risk in a manner acceptable to both the buyer and seller. The goal is to demonstrate that, while the risk factor exists, the likelihood of losing a key customer is remote.

Common concerns and questions include:

What would be the impact from the loss of a major customer?
Is there a customer contract in place? Is it transferable when the business is sold?
Is there an exclusivity relationship with the customer?
Is longevity of the relationship of significance with the customer?
Does the customer have more than one location serviced by the company or purchase multiple products? If so, this signifies that there is a co-dependency and solid relationship with this customer.
Does the customer enjoy preferential pricing that would be hard to find elsewhere? Is it a high-volume, low-margin customer? If so, the profitability of this customer's loss may not seriously impact the company's bottom line.
How painless is it for the customer to switch to a competitor and what could cause that to happen?
Is there a relationship with the current owner and the customer such that the continuity of the customer under new ownership may be uncertain?
What can be done to reduce this percentage of concentration?

Reduce a Buyer's Concern
A buyer's concern in this area may result in a lower sales price or a deal structure that would bridge the risk gap. For example, a certain portion of the purchase price may be held in escrow for a defined period of time in the event one or more customers are lost post-closing. Another possibility may include earn out payments based on company performance for a specified term. Of course, these deal structures place some of the risk back on the seller, which is not ideal for the seller since operational control is in the buyer’s hands.

Another strategy for the owner of a company with customer concentration issues might be to solicit their major accounts to enter into long-term contracts prior to putting the business on the market. Contractual revenues can significantly sooth a buyer’s fear of losing those customers when the business is transferred.

Customer concentration is a serious issue. Retention of major customers through a transition period will be a predominant concern of any buyer. With proper presentation, and by potentially structuring a deal that will mitigate some of this transactional risk, the better the probability of a sale and maintaining a fair purchase price.

Have a look at a very nice article by Horace Dediu "How much your customers worth?"

How to increase customer base? (based on source)