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Is Customer Concentration a Problem for Your Clients?

Submitted by John Brown on Fri, 06/18/2021 - 8:00am
customer Concentration

In our prior blog post, we argued that the ability to make specific suggestions about how owners can increase the value of their companies sets you and your practice apart from competitors. Not incidentally, that ability also leads to engagements with existing and prospective clients. 

Start the Conversation 

Exit Planners don’t wait for business owners to tell them about what’s bothering them. Instead, they initiate conversations about growing business value by asking owners to identify the roadblocks that prevent them from growing their businesses at the pace they wish. In response to owner input, Exit Planning Advisors then focus their attention on addressing and resolving that specific roadblock. Advisors like Ned Major who lack Exit Planning skills can typically only offer a sympathetic ear. 

Miriam’s Customer Concentration 

Miriam Klugiman was visibly anxious to end her meeting with her financial advisor Ned Major. 

“Miriam, I sense you’ve got something on your mind that’s disturbing you,” Ned observed. 

“Well I do, but it doesn’t have anything to do with you Ned.” 

“Tell me about it anyway,” asked Ned. 

Miriam responded, “You know that business hasn’t been doing great for the past couple of years. Now we just lost our second largest customer when it was purchased by an out-of-state company that works with our largest competitor.” 

“So, what does it mean?” asked Ned. 

“At a minimum, I’ll probably have to let some of my best people go. It also means more work for me. After that, I have to figure out how to make up the loss of almost a quarter of our revenue,” said Miriam as she stood to leave. 

Ned did his best to console Miriam as he walked her to the elevator. 

After Miriam left, Ned wondered how he could have helped her. His professional training didn’t give him the right tools to solve Miriam’s problem. 

Like Ned, you may be unaware that some of your clients are in situations similar to Miriam’s. Her business relied on about a half dozen customers who together generated 85% of her company’s revenue. 

There are distinct financial and operational advantages to this level of customer concentration. Attracting, providing great service to, and developing personal relationships with a handful of customers is easier less challenging and cheaper (in marketing and advertising) than trying to grow and deliver great service to a much larger customer base. 

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Greater Concentration, Greater Risk 

The problem with a highly concentrated customer base is that the consequences of losing a customer are greater. If a business loses one or two customers, its revenues suffer and its profits may disappear. Witness Miriam and her immediate problem.  

What she didn’t realize is that she also had a long-term problem. When owners go to sell businesses with high customer concentration, they find that private equity and other buyers want companies with broad customer bases. If a buyer is willing to make the purchase, they will likely pay the seller the full purchase price only if all the larger customers remain with the new owner for a set period of years. When owners fail to diversify their customer bases, they put the profitability of their companies and their financial security post exit at risk.   

What Can You Do? 

Professionals who “stick to their knitting” are typically skilled and knowledgeable in their professions, but they have no tools or advice to help their business clients grow and protect their greatest assets—their companies. 

Advisors who are skilled in Exit Planning use their knowledge to introduce owners to Value Drivers, then develop and strengthen them. These advisors create a network of other professional advisors whom they can bring in to help their clients with specific Value Drivers, such as recruiting and motivating top-notch managers. 

The role of the Exit Planning Advisor in helping owners like Miriam is primarily to educate owners about the value of a broad customer base—both immediately and in the long run—and the risk they run if they fail to build one. 

We suggest that you be that advisor and play that role. By gaining the knowledge that Ned lacked, you and your clients benefit. Your clients build and maintain enterprise value and you differentiate your practice from competitors.  

TAKEAWAYS 

  • Don’t wait for owners to tell you what’s keeping their businesses from growing. Ask. 
  • Advisors who understand the common growth obstacles and can remove them by referring their clients to other skilled professionals differentiate themselves from their competitors and help their clients to build enterprise value. 
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