Bob began his career working for a large telephone company. After several years Bob tired of corporate life and started his own company installing and maintaining telephone systems. He did well and built his company to just over $5 million in revenue. In his early sixties Bob started having health issues and he decided to put the company on the market.
Bob called me and I performed a market valuation for his company. During this time I learned that he had one customer that represented 52% of the company’s revenues. This represents a serious risk problem to any prospective buyer and significantly affects the value of the business.
With that problem in mind we finally agreed on a price for the business.
Several weeks later I was sitting around a table in a conference room helping to negotiate a letter of Intent (LOI) between Bob and a prospective buyer. Suddenly a knock came on the door and Bob opened the door and went outside. He returned about 5 minutes later and beckoned me to follow him outside. “We just learned that we lost ABC Company as a client. They recently hired a new purchasing agent and he decided to go in a different direction. We’ll have to end the negotiations and take the company off the market. We also need to cut our staff and restructure the company”.
Why was ABC Company so important that they had to cut staff and restructure the company? Because ABC represented 52% of their total revenues! As their business broker I knew that when I took them on as a client, but I rationalized that since ABC was a multibillion dollar company that a strategic buyer would want an “in” to this company that had offices and manufacturing plants all over the globe. That may have been true for just the “right strategic buyer”, but finding that buyer was very difficult.
We had found a buyer who was willing to negotiate, but it was clear that the high “customer concentration” was going to seriously affect my client’s value. With the loss of ABC Company not only did the negotiations with the strategic buyer end, but my client was struggling for survival. In the end Bob’s company survived as a much smaller company and he ultimately transferred ownership to a key employee for a fraction of the company’s former value.
After a couple of years the company closed its doors. Two years later Bob passed away with no legacy to pass on and a lot less money.
This is just one example of how one value driver (Customer Database) can seriously affect the value of a company. Customer concentration represents a risk to the buyer, and risk is directly related to a company’s value.
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