Value Drivers: Customer Concentration

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dv537029Big customers always seem to be a big carrot for business owners. It’s hard to blame them when the big orders come in. With all the excitement of the big order, the owner with extreme customer service focus makes the customer very happy. Over time, these large customers may drive down the gross margin of the business because of their power and influence, and because they know the business owner needs them. At first it seems ok. As time goes on, the big customer gets most of the owner’s attention and most of the company’s resources.

Often times we see businesses that have customers that exceed 50% of total revenues. The customers are challenging, but gee wiz, they are the best customer ever! Many times the business owner hasn’t done the analysis that may reveal the customer costs them much more than the value received.

Sometimes businesses are built solely to service one customer. The whole intent and strategy to enter the business was because of a connection with the customer or a creative fix to an existing problem that the customer had. The future challenge becomes building diversification in the business so that no customer exceeds 10-15% of revenues. The stress from having one major customer can be a real negative influence on business owner’s strategic actions. The decision to have one major customer is fantastic if the business owner understands the risk.

When a decision to sell the business enters the picture, customer concentration risk has a huge impact on value. The more concentration there is with a few customers, the lower the value of the business. It’s that simple. There is too much risk for any buyer, even strategic buyers. Talk to your Kansas City Business Broker for details of how to prepare ahead of time to transition your business to family, employee, or to an outside party.

Happy Holidays from Apex Business Advisors

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HappyHolidays22011 is winding down and we wanted to take a moment to wish you Happy Holidays! If you are like us, you are still scrambling for some last minute gifts and wondering how you are going to get to Costco in time to buy food for parties. As you run around, we hope you take the time to breathe and enjoy the season. Thank you for a great year! We appreciate your friendship and business and look forward to another great year together in 2012.

We believe that it is important to give back to our community. In 2012, we are partnering with the Marian Hope Center and will be supporting them through volunteering and contributions. Their mission is “to give hope to every child through innovative programming, education supports to parents/caregivers, and outreach services to the community.” They are growing and gaining recognition among health care, academic, and child advocacy professionals for their unique functional approach and phenomenal successes in treatment, instruction, and complete care for children and their families.

Due Diligence Mistakes of Sellers

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NoMistakes“I don’t have monthly financial statements. I don’t have an operations manual! Employee job descriptions… ha! It’s all in my brain.”

If you are trying to sell your business and any of the above statements ring true, you desperately need to seek help. The value of your business may have just dropped dramatically, and you can’t fix this problem in a short period of time. You need to have every bit of the financial picture of your company clearly documented and your accounting files and tax returns need to back up your data. Even if you aren’t trying to hide anything, the buyer might think you are. The risk you are taking is that the buyer walks away or uses this opportunity to reduce their offer.

A good reason to hire Apex is that we will help you through the pre-sale planning. The value of your business depends on this preparation.

Example: We had a potential seller that operated his business out of his checkbook with no monthly financials. There was enough cash flow to justify half a million for his business. However, nobody could touch the deal because there were no solid monthly financial records to show a bank, and prospective buyers couldn’t rely on the outdated tax returns.

Due to health issues, the seller didn’t have the time to fix the problem and had to shut down the business. Don’t let this happen to you. A little preparation goes a long way, and you need to start now if you haven’t already.

In our next blog post, we will be talking about the seller negotiation process, so stay tuned!

Negotiation as a Buyer

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BuyerNegotiationHard-nosed, Extreme Negotiation Tactics Rarely Work Well

As a buyer, understanding what you want the deal to look like when all is said and done is important. Be cognizant of how much flexibility you have and where you can give and take. Hitting the seller with unrealistic and extreme demands may just hinder your relationship with the seller. Starting your negotiating terms closer to where you want to ultimately end up may actually produce a better deal than you might expect.

Collaborative Vs. Confrontational – Guess which method will help you most?

Typically, sellers are not desperate. If you go into the deal in a confrontational manner, the seller is not going to share important information you need to know. The seller may believe that the buyer is looking for a reason not to do the deal because of the way they are acting. They might be thinking, “I don’t like you and I don’t want my employees to have to work with you!”

In a recent deal, the process for buying the business was stretched out an additional sixty days. Almost every conversation was a hard core negotiation for the buyer. As a result, the bank kept getting changes on what the deal looked like. It almost got to the point that the bank wanted to back out because they didn’t know what they were dealing with. The seller backed out a couple of times and the buyer came back saying “it was just negotiation, I can do something different!” This did not sit well with the seller.

The idea is to go in with what you really want. You need to have an understanding of what you are trying to get out of the opportunity. The end result needs to be a win-win for the buyer and the seller and that usually means that both parties have to give a little.

Due Diligence Mistakes of Buyers

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OopsWe see a few deals every year that end up being more challenging than they should have been. The issue is usually a lack of due diligence. Did the seller tell you everything? Due diligence is all about discovery. Is there something hidden in the financials? Can the seller verify that the revenue and cash flow are accurate? It is very important to double check these numbers so that you can make an informed decision.
Due diligence takes place after an offer is accepted. While a buyer is getting bank or funding approval, there is normally a period of two weeks to do the due diligence. The buyer and seller sit down to verify the information that has already been provided. If a seller avoids giving concrete documentation, you should see red flags.

We had a seller not willing to provide W2 information by claiming employee privacy issues. The seller was trying to hide the real cost of payroll. In essence, they were hiding the fact that business was down by burying it in the financial details.

We coach our buyers to do effective due diligence. Sometimes buyers need an accountant to help them go through the QuickBooks, Peachtree, or other accounting files to truly understand what the data means. If there are customer contracts to review, an attorney may need to be at the table. At the end of the day, we want our buyer to be as well informed as possible as we help them complete a deal. Finding inaccurate information doesn’t necessarily mean a deal is bad, it may help you negotiate a better deal.

In our next blog post, we will be talking about the buyer negotiation process, so stay tuned!