A couple of days ago we started a series of blog posts that look at common reasons deals either get complicated or take much longer to complete than needed. The issues we’re examining can be easily corrected with strategic planning, hard work, and dedication to addressing the issues.
In the first article we looked at the problems buyers often have with excessive owner dependence and provided guidance on how you can overcome this concern. As a reminder, we are not implying that if your company has any of these issues that your business is not sale-able or attractive to buyers. With enough of the right intangible assets, your company could be very valuable to a variety of buyers. However, what we are telling you is that if you want an OPTIMAL deal with a PREMIUM buyer, addressing these common issues can be very helpful to you and your transaction.
What does “customer concentration” mean? To different buyers it means a variety of things. In general, if a significant percentage of a business’s revenue is generated by a limited number of clients, buyers may have some concerns. Secondarily, if these key revenue streams are largely dependent on the current owner’s relationships with the clients, buyers may have trepidation about this as well. So let’s look at both of these items.
First, the definition of “significant” will vary depending on the type of buyer you are interested in attracting. For example, if your industry is comprised of a limited number of potential clients and you are trying to close a deal with a strategic player in the same industry who understands the nuances, it may not be a major factor at all. Having said that, if more than 20% of your revenue comes from a single client, even industry buyers will have some concerns.
Likewise, if your buyer is outside the industry, perhaps a synergistic strategic player or an equity firm creating a platform, dependence on a limited number of clients could be considered a risk factor.
This does not mean that these types of buyers will walk away from your opportunity. What it usually means is that due diligence (the research that buyers do to ensure that what they are acquiring meets their standards and expectations) may take longer and require more reps and warranties on your part; and that the ultimate deal structure may include an earn-out period so that they can ensure that the client base remains loyal under new ownership.
In addition, and this harkens back to our first post in this series, if you as the owner also “own” the relationships with these key clients, buyers may have heightened concerns not only about concentration of revenue but also about the longevity of the accounts upon your departure. Again, this will not necessarily kill your deal, but it will prolong due diligence as buyers will likely want to have pre-deal close conversations with all key customers to determine if your exit will impact business.
Again, a common way to get around this issue is an earn-out of 2-3 years. However, keep in mind that this structure usually commits you to staying with the company in some capacity, often as CEO, for that timeframe and ensuring the revenue/earnings targets are met. Certainly there is tremendous upside to this structure assuming the company exceeds the earn-out parameters. Conversely, should it not, targets may be missed reducing your ultimate payout, and under the new ownership you may not have as much authority to affect change and make decisions as you have now.
Enter the market and discussions with buyers after conducting a full business review. You and your sales staff may have grown far too complacent the last few years. Certainly the recovery from the Great Recession has caused many business owners to accept business and write contracts with entities that they may have turned down when times were better.
It is important to analyze your customer mix every six months anyway, whether you are going to market or not. If you find that a few key clients are now generating more revenue than you expected, it might be a good idea to create an incentive plan to encourage your sales staff to aggressively pursue other business.
The good news is that this can be accomplished while still marketing your business – they are not mutually exclusive, i.e., you don’t have to wait until everything in your client base is “cleaned up.” In fact, buyers will be impressed if you and your sales team are actively pursuing other business and that you have strategies in place to effectively do so. Buyers appreciate that businesses are addressing issues, planning, and participating in strategic business development.
If you would like to learn more about how buyers approach companies and what they look for, attending a Generational Equity M&A seminar would be of benefit to you. We hold these complimentary, no-obligation meetings throughout North America and the U.K., and they are designed to enable business owners just like you discover how and when to effectively exit your company.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2015 Generational Equity, LLC. All Rights Reserved.
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
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.
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
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
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
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
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 quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
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
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
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
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
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.
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
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
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.
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
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
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
By submitting my name electronically and clicking the “submit” button, I understand that I am providing Generational Group, Inc., Generational Equity, LLC, Generational Capital Markets, LLC, DealForce LLC, their affiliates, representatives, contractors, etc. (“Generational Group”) my telephone number, which may include a number that is wireless and/or a number that is on a national, state, or other Do Not Call registry or list. I hereby consent and agree to receive telephone calls including any autodialed and/or pre-recorded telemarketing calls and/or text messages (telemarketing) from or on behalf of Generational Group at the telephone number provided. I further consent and agree that telephone calls may be made using automated technology such as an automatic telephone dialing system, artificial or prerecorded voice, or SMS text messaging. Consent is not a condition of purchase. I further warrant and represent that any telephone number provided is not on any state or national Do Not Call Registry and that by agreeing to these terms and conditions that if any number provided is on any such registry, I hereby consent and agree to receive telemarking calls and/or communications including any phone calls, text messages, URLs, links, emails, etc. to the telephone number(s) and/or any e-mail addresses provided. I understand that by entering my name in the electronic form provided, that I am signing my name as equally as if it was my handwritten signature and that it is my intent to provide an “electronic signature” as that term is defined in state and federal law, as well as industry practices for e-commerce.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.
Honored to win Investment Banking Firm of the Year 2 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.