Customer Mix & Value

Spread 'em wide - sell with pride

The seller sat in front of me and proudly displayed his list of customers: "Just look at the business Sasol gives us each month", he proudly intoned. "These guys need our product, and they pay within seven days of statement", he went on. "Sure we have another 100 odd customers, but these guys average about 40% of our turnover every month".

The proud boast was based on the mistaken belief that turnover drives the value of businesses, even if it means discarding the risk inherent in a concentrated group of customers. Oh, sometimes you feel so good because you have this really big customer, and he pays on time, and he orders every month, and he's the guy that covers all the bills, making all the others "pure profit". Well don't sleep too comfortably because you may be only a few months from being broke. And most buyers of businesses are quick to identify that narrow spread of customers, and walk away.

Buyers walk away, not because the profit is not there, but because the narrow source of income is too risky. An ill advised statement from a salesman, or a better product appearance could turn your business from a profitable concern to a loss maker over night. You can run the exercise yourself:

Take your financial statements or management accounts; the income statement in particular. Calculate the percentage of turnover attributed to your biggest customer, and remove this percentage from your gross profit. Subtract your fixed expenses (unchanged) from the recalculated gross profit. Is your business still profitable? Will you be able to survive? If the answer is painful, but do-able, you have some value in your business, but you have a warning. If your answer points to imminent bankruptcy, you know that you have some work to do on your customer base to strengthen the value.

Your guidelines should be as follows: No single customer should provide more than 5% of your turnover (although most buyers only start to worry at about 15%), and the collective amount brought in by your top 4 customers should not exceed 30%, regardless.

Do you look to tone down these large accounts? Obviously not! What you need to understand is that as long as your smaller customers remain undeveloped, your money spinner is at risk, and is not mature as a business. Rework your marketing plan to either bring in more customers or increase the spending of your smaller customers. In other words - get more sales!

Other related issues which mature business buyers will look at are: Any personal relationships which may exist between the seller and his customers, seller - customer relationships based on verbal promises, old boys networks and church groups making up a customer base. If seller - supplier relationships are not at arms length, but based on cosy buddy-buddy relationships, chances are that you own a job, rather than a business. And when it comes time to sell, any savvy buyer will look with grave distrust on any enterprise in this position.