Too Much Revenue for ONE Customer?

This is another real world story of the interesting situations that we find when brokering deals.

We had a great business with great cash flow and great products. On the surface, everything looked like this was a business that could be sold at 3 or 4 times cash flow. When we dug deeper, we found that there was one huge customer. Yes, the customer was profitable, but they made up two-thirds of the business revenue. That is challenge enough, but it got worse. The account manager for this major customer was a family member of the owner, and was being paid twice the market rate for their position.

The price of a business gets discounted for each of these situations separately, but when combined, it makes it almost impossible to get a deal done. In this situation, the person that would benefit the most and have the best chance for success, as a buyer, is the family member. But they are also the individual with the most leverage to influence business price.

What could the business owner have done to have a better chance at selling? The business owner needed to be making strategic changes at least 12 months before trying to sell. The first move would be to get a new account manager involved with the major customer to minimize the risk of the relationship with the family member. In addition, it would be a good idea to have an employment agreement in place with the new account manager that includes a non-compete. The harder thing is to expand the business so that one customer doesn’t represent so much of the revenue stream. Not easy, but this can be done.

If everything can be fixed except for the customer concentration, you could probably sell, but be prepared to finance the buyer.