By: Mike Bloom
Customer Concentration Creates Risk
Another way to enhance the value of your business before beginning a transaction is to reduce customer concentration.
Customer concentration occurs when a single customer or client accounts for 10% or more of your revenue, or when your largest five customers account for 25% or more of your revenue.
When a business is overly-reliant on a small group of customers or clients, its revenue will be highly sensitive. A 10%-25% revenue drop can cause a business to go from being profitable to dropping below break-even and threaten its ability to survive.
A concentrated customer base increases the risk for the owners, everyone who depends on the existence of the business, and for potential purchasers, who value businesses commensurate with the risk involved in their cash flows. For a potential purchaser to invest in a business with a concentrated customer base, their rate of return will need to be higher, which translates to a lower value purchase price.
To achieve the highest possible purchase price, expand and diversify your customer base to the extent possible before beginning a transaction.
Do you already have a diversified customer base? Do you think you are ready to sell your business? Take the Seller Readiness Quiz to see if you are ready to begin the sell-side process.
About Piedmont M&A Advisors
Piedmont M&A Advisors is a boutique investment banking firm specializing in buy-side and sell-side transactions for businesses with revenues between $10 million and $200 million. We also provide capital raising, valuation, and strategic advisory services.
To learn more about Piedmont M&A Advisors, or to discuss questions you might have today about selling your business, contact us today for a free consultation.