What exactly is customer concentration and how does it hurt business value? Both of these are good questions – ones that are important to understand if you are deciding to sell your business. To increase the value of your business, it is important to reduce customer concentration.
What is customer concentration?
Customer concentration has two definitions:
- When a single customer or client makes up 10% or more of your revenue, or
- When your largest five customers account for 25% or more of the business’s revenue
This poses a risk to a business because it can become overly reliant on this one or a small group of customers and clients. If these individuals were to take their money elsewhere, the business would go from profitable to dropping below breaking even. This would threaten a business’s ability to survive. However, there is little reason for a customer base to leave, unless you are selling your business and their loyalty is to you.
If a potential buyer finds that you have high customer concentration, they may not want to risk it. In this situation, they may still make a purchase – but could lower their offer.
How do I prevent concentration risk?
You will need to diversify and expand your customer reach. You need to spread out sales and revenue among a broader range of customers or clients. Of course, this is easier said than done.
The best way to diversify a customer base is to diversify the goods. What are some of the most popular goods or services that your business offers? Now, take that research a little further – what are the most popular goods or services within your customer concentration group? Does your group fit a specific demographic? If the answer is yes, consider offering new options for a different age group, gender, industry background, etc.
For example, if your business sells stationery and your biggest client is a wedding planner, consider branching out to offer business cards and business stationery. Have you considered offering classes to teach calligraphy, selling custom invitations for parties and other events, or offering to address and mail invitations for your clients? By expanding your reach, you prevent the risk of losing high profit from your wedding stationery business that may come from that one loyal wedding planner client.
Can I sell my business with customer concentration?
The short answer is yes. Of course, as mentioned above, things might be a little more complicated – due to the potential risk. The key is the listing price, and how you advertise your business during the sale. The best way to sell your business efficiently, profitably, and honestly, is with the guide of an experienced business advisor. With a deep dive into your financial books and a deep understanding of your customer base, a knowledgeable business advisor will know how to list, market, and sell your business to the right buyer
What’s next? Call the local experts in selling businesses, Transworld Business Advisors San Diego North, to start the process!