04 Oct '23

Overcoming Customer Concentration Issues When Selling a Business

If planning on selling your business in the future, you want to make sure you’re expanding your client / customer base as much as possible in the present moment. Customer concentration issues can not only affect your final sales price but terms.

Relying too much on just a few clients is a risky proposition for business owners as you are tying up most of your revenue streams among just a few sources.

As a business owner, you want to begin working on diversifying your client base as soon as possible. Growing your customer base will also help improve sales, while reducing risk on the current operation of your business – two things that will help you sell your business for a better price, and put more money in your pocket in the time being.

Customer Concentration and Risk for Buyers

In order to understand how customer concentration issues can affect the sale of a business, take a look at the situation from the point of view of a buyer. Imagine for instance you’re a buyer looking at a business worth $1 million dollars, with $500,000 in owner’s benefit (SDE). Now let’s say that $500,000 comes from two major customers.

How confident would you be moving forward to purchase this business? What if there were no long-term contracts in place, and one of the customers decides to take their business elsewhere? In that case, you’ll be taking home $250,000, and the business will now be worth $500,000 instead of the million it was worth prior to that customer leaving.

A big risk for buyers!

Assurances Buyers Will Want When Purchasing a Business with Customer Concentration Issues

If currently selling a business where just a few customers make up the majority of your revenue, the following can help appease many buyers’ concerns:

Seller financing – Depending on how concentrated the customer breakdown is, buyers will look for different levels of seller financing, to ensure that you still have some “skin in the game” and share some of the risk along with the buyer. For instance, if a business has two major clients, buyers may look for up to 50% seller financing! With less concentration – let’s say five major clients – buyers may look for less seller financing; 20% for example.

An earn-out, where payments are made if the business continues to hit expected goals in the future, is another option to help ease buyers’ concerns when purchasing your business.

Long-term contracts in place – If your clients have long-term contracts in place that will ensure they will stay with the business for an extended amount of time into the future, that can appease much of the buyers concerns, and reduce any financial impact the situation may have on the business’s salability.

Sizable discount on price – Some buyers may be willing to shoulder more risk than others, and a discount may be enough to put them at ease. The size of this discount generally depends on the level of concentration present in the business.

Growing Your Customer Base Makes For a Much More “Sellable” Business

As a business owner, keep these points in mind. For the current and future success of your business. Expanding your customer base will reduce risk, increase sales, and help your business sell easier and for a better price point (with better terms) when it comes time to sell.

For a business valuation, see here!