Wednesday, February 3, 2010

Large Customer Impacts Business Value

Within the past two months I have encountered two different firms, each of which had one specific customer that accounted for approximately 50% of all sales!

One case involved a $575,000 company with one customer accounting for $250,000 of those sales; In the second case, the firm had annual sales of $1.55 million, with a single customer accounting for approximately $700,000! Almost hard to believe.

Both firms are indeed profitable, with one qualifying in the top 25th Percentile in terms of profits. However, the vast majority of potential buyers out there will simply not consider a company like this, almost regardless of offering price, when a customer represents that large a percentage of sales.

In one of the situations there is 3-year printing contract up for renewal. If the contract is renewed it would make the purchase a bit easier to swallow, but most printing contracts that I have seen are not that rock solid. Even if we had a contract in place, a smart buyer would make the sale contingent upon retaining this customer and/or the length of the purchase contract would equal the length of printing contract. Also, if the buyer could not finance the purchase out of excess earnings during that same period of time then he probably should walk away.

In the other situation, there is a sibling who has been working for the business for more than 15 years and the parent's are ready to sell. However, there is a huge difference between what the father thinks the business is worth and the sibling who wants to buy the company. By the way, the sibling is the one responsible for attracting and maintaining the $700,000 account.

In a real sense, the sibling has the parent over the proverbial barrel and lately discussions as to the purchase of the business have gotten quite heated. What is really surprising is that neither the sibling or the parents have discussed the value of the business or its purchase in the past 15 years!

So now what happens. Stay tuned...


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