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Does a diverse customer base enhance the value of your company?

By Generational Equity

Diverse Customer Base

Are you aware of the key factors that impact your company’s value? Often, these are clear to see. These include projected cash flows, the reputation of your business, the value of your assets and the general outlook for your industry. A combination of these elements will positively or negatively impact your business valuation when the time comes to take it to market.

However, other aspects are not quite as obvious, yet can be instrumental in establishing your company’s overall value. One of these is the diversity of a company’s customer base. Of course, many companies are proud of the long-term relationship they have established with a respected client. This can be an important factor in getting your start-up company off the ground.

But, from that moment on, it is important to diversify. Late last year, a report published by the Business Development Bank of Canada (BDC) highlighted the significance a diverse customer base has on your overall business valuation. Their survey of nearly 1,000 Alberta SMEs brought attention to important details that all business owners should be aware of:

  • 7 out of 10 diversified firms achieved high revenue and profit growth in the past three years, compared to 2 out of 10 with customer concentration issues
  • Low reliance on a particular customer is the biggest predictor of whether firms are confident about their prospects for the next 12 months
  • Small and mid-sized businesses that are diversified in more than two ways (customer, products, services, location of operations) are far more likely to attain strong financial success

A startling statistic from the BDC’s report is that 62% of the Alberta businesses surveyed said they do not rely on a single customer for their revenue. This indicates that close to 38% of Alberta companies have customer concentration issues, which could prove problematic to many potential buyers.

Take for example the case of Celestica in 2013. The Toronto-based electronics manufacturing company had annual revenue of US$6.5 billion in 2012. However, Smartphone constructors Blackberry generated approximately 20% of this. When they were forced to end their relationship due to their own cost-cutting measures, Celestica’s first-quarter results were down 19%, forcing the business to reinvent itself in recent years in a bid to rebuild.

Consider this scenario: You wish to place your Vancouver-based manufacturing company on the market, buoyed by a compound annual growth of 20% over the past five years, improving profit margins and an annual revenue of C$18 million. However, a professional buyer has been alerted by the fact a single customer is responsible for 28% of this annual revenue.

Investors will likely be concerned by this overreliance on a sole client. They would consequently be more likely to shift their interests toward a similar business with a broader customer base, as it represents a greatly reduced risk (and buyers hate risk). While total revenue and consistent growth are important, they can be significantly impacted by the hazards associated with relying on a single source for revenue.

This scenario also makes it difficult to convince investors that the relationship with this prominent client is not predicated on their connection with the current owners. This would be viewed as a sizeable risk factor to many buyers; what if the customer was to cut back on orders following the change of ownership? Clearly, the revenue of the company will inevitably suffer.

There is a solution to this problem. It is crucial to never allow your company to become complacent in its marketing and sales efforts. As time goes on, you can find yourself dependent on the income generated from this single source, placing your future earnings at risk from the perspective of a potential buyer.

Therefore, when you decide the time is right to sell your small business, you should conduct a thorough review of your client list. If you find that your company has become reliant on a single stream of revenue, it is important to identify and pursue additional sources before your business is ready for market.

In short, business owners cannot afford to rest when it comes to their sales and marketing efforts. Continue to expand your base, seek out new sources of revenue and diversify every aspect of your business. Following these steps may boost your company’s market value and enhance its sale-ability.

Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”
Karen S. Williams, CFO, BW Manufacturing
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!
Andy Graham, Vice President, Modern Heating & Plumbing
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.
Larry Moore, Owner, A Company Portable Restrooms
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Terry D. Wickman, President, Keytroller
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.
Robert Evans, President and CEO of Mealtracker Dietary Software
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.
Michael J Polarek, President, Paragon Packaging
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.
Andy Graham, Vice President, Modern Heating & Plumbing
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.
Michael J Polarek, President, Paragon Packaging
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.
Terry D. Wickman, President, Keytroller
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.
Karen S. Williams, CFO, BW Manufacturing
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.
Jay Dinnison, Owner of Sharpe Mixers
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.
Pete L.
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.
Robert Evans, President and CEO of Mealtracker Dietary Software