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.
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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 wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.Shane and Johanna Kline, Owners of Vision Upfitters
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
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.Betty L. Brennan, President, Taylor Studios
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward. P.S. Given my experience with GE I felt comfortable enough to sign up with Generation Wealth Advisors!Tom Currier, Former President & CEO, Rackmount Solutions
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.
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).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.
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!JoAnn Ellis, Owner of Fondren 5 Star Kennels
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.
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
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.
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.Caroline Connelly, CEO, OptoTest
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
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.Rick Greene of Dobbs Equity Partners LLC
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
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.JoAnn Ellis, Owner of Fondren 5 Star Kennels
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
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
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
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.Salvo Stoch, Founder and CEO of Sleeping Partners
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