Create a Customer Concentration List

A significant reliance on one or a few customers will directly impact your business's sellability. A high level of customer concentration is risky for a potential buyer who will request a customer concentration list as part of their due diligence process. A wise approach to strategically building a business that is indeed sellable and to being prepared for a future sale transaction is to create and manage a customer list as part of your ongoing business management process.

The following is a guide to help you create a customer concentration list that you could use to manage your business and present to potential buyers. This list is an excellent way to show the distribution and reliability of your revenue sources.

1. Listing Your Top Customers: This is a pivotal step. Identify the top customers who significantly contribute to your revenue, such as those who make up 5% or more of your total revenue. You may use a different threshold based on your business's size, but the key is to identify those who are the backbone of your business.

2. Revenue Contribution: Indicate each customer's percentage contribution to your revenue. This will give potential buyers a sense of your business's dependency on specific clients.

3. Contract Details: If applicable, mention if there are long-term contracts in place. Include contract duration, renewal terms, and any exclusivity arrangements. This helps buyers understand the stability of these revenue streams.

4. Customer Industry and Type: Indicate the type of industry each customer belongs to, which can show diversity across sectors and mitigate risks associated with industry-specific downturns.

5. Historical Relationship: Include the years you’ve worked with each customer. Long-term relationships indicate stability and customer satisfaction.

6. Growth Potential and Upselling: Highlight any growth potential with each customer, like opportunities for cross-selling or upselling, which can be valuable to the buyer.

7. Transparent About Risks. For instance, if you have customers who are not bound by contracts or who have been responsible for high revenue volatility, it's best to disclose this. Buyers will appreciate the honesty and transparency.

By providing this list, you're giving potential buyers a clear understanding of your customer base's reliability and concentration risk. This is crucial for them to evaluate your business's stability and growth potential. Also, if you include this level of customer analysis as an ongoing management process, you will be better prepared to tell and sell your business story when a transaction opportunity presents itself.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

What Should I Expect in a Due Diligence Process When Selling My Business?

When selling a business, the buyer typically conducts a due diligence process to gather and evaluate relevant information about the business. Due diligence aims to assess the business's risks, opportunities, and value before finalizing the transaction. While the specific scope and depth of due diligence can vary, here are some common areas that may be examined:

• Financial Due Diligence: This involves thoroughly reviewing the business's financial statements, tax returns, and accounting records. It includes analyzing revenue and expense trends, assessing the quality of earnings, identifying any potential financial risks or liabilities, and verifying the accuracy of financial information.

• Legal: Legal due diligence aims to identify any legal issues or risks associated with the business. It involves reviewing contracts, leases, licenses, permits, litigation history, intellectual property rights, employee agreements, and other legal documents relevant to the business. The goal is to ensure the business complies with applicable laws and regulations and assess potential legal liabilities.

• Operational: This focuses on evaluating the operational aspects of the business. It may involve assessing the efficiency of business processes, analyzing supply chain management, reviewing inventory and production systems, evaluating customer contracts and relationships, and examining the overall operational infrastructure of the business.

• Human Resources: Human resources due diligence involves reviewing employee-related matters, such as employment contracts, organizational structure, key employee roles and responsibilities, compensation and benefits, labor agreements, and any potential legal issues related to employees. The buyer may also assess the culture and employee morale to ensure a smooth transition.

• Customer and Market: This entails analyzing the business's customer base, sales pipeline, market trends, competitive landscape, and marketing strategies. The buyer may seek to understand the business's market positioning, growth potential, customer satisfaction levels, and any risks associated with customer concentration or changing market dynamics.

• IT and Technology: With increasing reliance on technology, due diligence may involve evaluating the IT infrastructure, software systems, cybersecurity measures, data privacy compliance, and intellectual property related to technology. This assessment ensures that the business's IT assets are secure, reliable, and capable of supporting future growth.

• Environmental and Regulatory: Depending on the nature of the business, environmental and regulatory factors may be assessed to identify any compliance issues or potential liabilities. This may include reviewing permits, environmental impact assessments, hazardous material handling, and compliance with relevant regulations.

• Other Areas: Depending on the specific industry or nature of the business, additional areas of due diligence may be conducted. For example, a property appraisal or environmental assessment may be conducted if the business has significant real estate holdings. Intellectual property due diligence may be necessary for businesses heavily reliant on patents, trademarks, or copyrights.

The due diligence process can be time-consuming and may require the involvement of various professionals, such as accountants, lawyers, industry experts, and consultants. It's essential to be prepared and organized, providing the necessary documentation and access to the information requested by the buyer. Engaging experienced advisors can help you navigate the due diligence process effectively and ensure a smoother transaction.

Contact us at email@ennislp.com for a free Due Diligence Checklist.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Deal Momentum, Deal Fatigue, and Pre-Sale Diligence

With the help of her Exit Planning Advisor, Betty has decided that a sale to a third-party buyer would best accomplish all of her goals (financial; values-based; legacy).

The process of quantifying her business and personal resources, with a financial gap analysis, has been helpful to Betty in determining her departure date in six years. She now knows the current fair market value of her business, and how much it will need to increase in value for the attainment of her financial objectives at sale in six years.

Betty now also understands (again with the help of her Exit Planning Advisor) the importance of maintaining “deal momentum” when she eventually enters into a sale transaction.

Betty now knows that all too often “deal fatigue” sets in and damages or destroys deal momentum experienced early in the process. She also understands that deal fatigue is typically the result of a difficult and lengthy due diligence process. Due diligence is defined as the process by which the buyer requests documents, data, and other information pertaining to the business they want to review to identify any potential liabilities or hindrances to a deal getting done. The process of due diligence involves setting up a digital “Data Room” where all requested information is deposited for review.

A key component of Betty’s comprehensive plan for exit is to do everything possible to ensure deal momentum and avoid deal fatigue when the time comes.

Betty also wants to be prepared if a serious and qualified buyer comes calling earlier than her six-year time frame. So, with the assistance of her Exit Planning Advisor, she is going to conduct “Pre-Sale Diligence” systematically over the next 12 months, including the set-up of a virtual data room which she will regularly review and update as needed. This preemptive approach will significantly increase her chances of deal momentum and a smooth transaction experience.

At that point in the future, when Betty’s either approached by a potential buyer or when she takes her business to market, having conducted Pre-Sale Diligence, she will be better prepared, more confident, and less stressed and anxious — all of which lend toward sustaining deal momentum and a successful transaction.

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Contact us if you would like assistance with Pre-Sale Diligence | email@ennislp.com | 301-943-8203

Complete our FREE ExitMap® Assessment and get a 12-page report scoring you in four key planning areas: Finance, Planning, Profit/Revenue, and Operations. It will take about 15 minutes and we do not ask for confidential information.