A red flag for a buyer is a company with a few customers or even just one (yes, that does happen). If one or two customers leave, how much is the company now worth? Little to nothing.
Would you buy a company where sales and profits are tied to a few customers, regardless of how long the customer relationships are?
To increase the attractiveness of your company to potential buyers, diversify your customer base. The more diverse it is, the more alternatives the company has if challenges arise (and we all know they will).
Two rules of thumb. A company should have no one client that accounts for more than 10% of total sales or gross profits. Your five largest clients should provide no more than 25% of sales and gross profits.
To diversify, look to move into new sectors. Expanding geographically is one possibility. The pandemic has taught us we can work from anywhere. This realization is moving to the thought our suppliers and professionals can be anywhere, too.
Think outside the box. How will my product or service provide value to a different industry or customer base?
Adidas is a great example of a company who successfully thought outside the box. Initially a sports-only clothing brand, Adidas expanded to all types of clothing, growing their target market from just athletes to everyone.
When diversifying, stick to your core competencies and continue to align your company with its core values.
What are the new services and products your business potentially has? Accounting firms now offer business development services. This aligns with their expertise gained from working with hundreds of businesses. The average business owner has experience with just one business.
A company’s customer base is one of the most important items a prospective buyer will scrutinize. Companies lacking a diverse customer base will cause potential buyers to look elsewhere or make a low offer. Companies with diverse clients will impress buyers.
(learn more about identifying your company base with this article from entrepeneur.com )
Contact us to explore how you can diversify your customer base to fill your pockets with more cash.
Another power tip for small business owners and their advisors from JBV.