Over the life of the blog, much has been posted about Deal Killers, those pesky things to avoid when you’re selling your company. John Hammett wrote a great series of blog posts several years ago that still stands the test of time. I thought it was a good idea to revisit this series of posts. The first blog post in this series discussed Deal Killer #1, No Management Depth. The second deal killer focuses on the lifeline of a business…its customers. This is the 2nd in a series of 5.
Deal Killer #2 – CUSTOMER CONCENTRATION.
A company with more than 20% of its business with any one customer has a major potential Deal Killer. Customer concentrations of 30%, 40%, 50% make it increasingly harder for owners to sell a company. Even if big customer is a well-regarded company, buyers do not want the risks associated with a sudden loss of such a large portion of business.
Many companies grow with the growth of a few key customers because it is often easier to cultivate one or two strong relationships. Keeping up with the demands of a large or a fast-growing customer can take attention away from the task of broadening the company’s customer base. Sometimes buyers have the perception that customer concentration is an indication that the management team is lazy.
In addition to customer concentration, some buyers also lower value for industry concentrations. For example, a company that builds products exclusively for the automotive industry may be facing a concentration Deal Killer, even if the sales are distributed among ten companies.
ANTIDOTES. The best and fastest antidote for this situation is to find a buyer for whom that major customer adds strategic value. Some companies will make acquisitions to get access to a customer that brings additional value to their business. A company that is a good vendor to companies like, Target, 3M, Microsoft, or Boeing may find a buyer that wants that relationship bad enough to buy them.
Another approach is for the company to try to demonstrate that the concentration is composed of multiple contracts with multiple divisions of a large company. What might look like a concentration with General Electric may, in fact, be ten separate business arrangements with five separate divisions. Showing this to buyers may reduce the penalty of higher customer concentration.
Owners with more time to address this Deal Killer should focus on building new business with new customers in order to reduce concentration over the long term.