Posts Tagged ‘business value’

Customer Concentration

Friday, August 19th, 2011

Pretend there are two companies with identical financial statements. We’ll call them Company A and Company B. Both have been in business the same amount of time, and they are both in the same industry. They are even located in the same city. Yet one will likely sell for at least 20% more than the other.

Why is this? Company A has 15% of its business with a single customer and 10% with another single customer. Company B has no single customer that accounts for more than 3% of total business. No matter how wonderful those two big customers of Company A may be, that level of customer concentration negatively impacts the value of the company.

Buyers are very skittish about buying a business with significant customer concentration issues. They won’t be convinced by assurances that the large customers(s) will not go elsewhere. The fear: if I lose a customer that accounts for 15% or even 10% of total business, the business I just bought will suffer significantly. It could even put my business in sever danger. Even if they retain those large customers, the reality is those customers have a great deal of power over Company A. Suppose the 15% customer decides to pay in 60 days instead of 30. What does the new owner do about it?

Buyers will, with some justification, discount the worth of very large customers when computing their view of business value.