Some risks hide in plain sight because from the inside they look like success. Two of them quietly cut more deal prices than anything else I know, customer concentration and owner-dependence. Both are fixable, but only with real lead time, so I want you to see them the way a buyer will, early enough to do something about it.
Customer concentration
One customer loves you. They keep buying more, until they become 30, 40, sometimes 60 percent of your revenue. You feel great, because that relationship pays for your house. Then a buyer looks at it and sees the single biggest risk in the company, and your price drops. Here is why: when a buyer pays a multiple of earnings, they are betting those earnings keep coming after you leave. If one customer is 40 percent of revenue, the buyer is betting that customer, who has a personal relationship with you, the departing owner, stays loyal to a stranger. That is a frightening bet, and buyers price fear.
As a rough guide to how a buyer reads it, a top customer under about 10 to 15 percent draws little attention, 20 percent or more starts to worry them, and at 30 to 50 percent the business can be hard to sell at all without heavy deal protections like escrows and earn-outs. The same goes the other way around for suppliers, since one irreplaceable vendor is concentration too. The fix is not to fire your best customer. It is to grow everyone else faster so the big account becomes a smaller slice of a bigger pie, to put your largest customers on multi-year contracts that survive a change of ownership, and to move those relationships off yourself and onto your team so the buyer can believe they stay after you are gone. At Protect A Bed our biggest retail anchor grew from 40 stores to about 4,500, a wonderful relationship, but we also built a hospitality division, sold to pest control companies, ran our own companies in England, China, Taiwan, and Canada, and sold through distributors in another 44 countries. No single customer concentration could affect our valuation, and that is exactly what a buyer pays a premium for.
Owner-dependence
The second silent killer is you. If the business is the owner, and everything runs through your hands and your head, then the moment you leave, the buyer's risk spikes. This is the single thing a private-equity buyer punishes hardest, because they are explicitly buying a business that keeps running without its founder. The cure is a real second-in-command who could run the place if you took ninety days off, processes written down instead of living in your memory, and key relationships, customers and suppliers both, that belong to the team and not only to you. None of this happens in the month before a sale, but all of it can be built in twelve to eighteen months if you start now. The test is simple and a little uncomfortable. If three months away would leave the business wobbling, you have a project, and it is one of the highest-return projects in this book.
Chapter 4 checklist
- Calculate your top customer as a percent of revenue, then your top five combined, and pull three years of revenue by customer to see whether the big accounts are sticky or churning.
- Check supplier and vendor concentration too, not just customers.
- If any single customer is over about 25 percent, build a written two-to-three-year plan to grow the rest of the base faster, and get your largest accounts onto transferable multi-year contracts.
- Move your biggest relationships off yourself and onto your team, and prove they hold without you.
- Name a real second-in-command who could run the business for ninety days without you, and start writing down what currently lives only in your head.