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.

Focus On Net Proceeds And Not Just Sale Price When Selling Your Business

John was excited as “today is the day!” Twenty-five years ago this month he had started his home remodeling business with a truck and a tool belt, and today at 3pm he was going to the deal table to sell his business to a much larger remodeling company. It would be a strategic purchase for the buyer who was willing to pay a premium with a goal of expansion in the region. With the check received today, John knew he could now do everything he and Kim had thought about doing for years — travel, more time with the family and for hobby’s and other interests they both enjoyed.

The amount received actually exceeded John’s “number”, and hence, he and Kim spontaneously pulled together a celebration dinner with family and a few close friends at their favorite restaurant. John had done a great job through the years building a “sellable business” focusing on a strong management team, strong financial performance, a plan for growth, up-to-date systems and processes and other value drivers which and now he was reaping the rewards. There was indeed much to celebrate!

Fast forward, six months later: John has come to realize that his number needed to be quite a bit larger than what he had originally calculated. In whatever way he had performed his calculations, he failed to consider to the extent needed, or at all, the following important factors in the equation:

• Of the $10 million in proceeds, he was going to net approximately $6 million after these charges/expenses:

  • Transaction and professional fees.

  • An asset sale was negotiated and there was income tax on some asset depreciation recapture.

  • $1 million in business debt needed to be repaid.

  • Capital gains and affordable care act taxes.

  • Miscellaneous expenses including “stay bonuses” for two key employees.

John was in a small percentage of small business owners who have built a sellable business and actually sold it for their “number”. For that, he is to be commended and congratulated. At the same time, John was now experiencing much regret and was actually concerned about his financial ability to do everything he and Kim had planned on. What could have John done differently when planning for this most significant event? Worked with his exit, financial, transaction, and tax advisors well in advance of the sale in calculating the real number… net sale proceeds…and whether or not he and Kim could do all they wanted with that number.

If you need help contact us at 301-859-0860 or email@ennislp.com. 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.

How Will Selling (Or Not Selling) Your Business Impact Your Lifestyle In The Future?

Our fictional business owner, Baby Boomer Jane Doe, is like most owners in that her business is her largest asset and will play a central role in achieving future financial security, goals, and dreams.  Jane has been in business approximately 25 years and, as a result of the steady stream of business revenue, she has experienced a very comfortable lifestyle that includes two homes, private education for the children, annual vacations, and plenty of discretionary income.  

But now Jane wants to plan for "what's next" as she now has grandchildren in different states she wants to visit regularly and has lost the passion once enjoyed in owning and running the business.  In conversation, Jane says with a level of exasperation, "I'm just ready to leave the business...I'm done".  Jane doesn't have management or children interested in purchasing the business, no longer wants to be an owner and thinks the best exit route would be a third-party sale.  

After engaging an exit planner to lead the design and implementation of her plan to leave, Jane is alarmed and disappointed to learn that her business is worth quite a bit less than what she had estimated and that a significant increase in her investable assets will be required to do all she wants to do post-exit.  Her financial planner assessed that her "plan for life after the business" would have a price tag of at least $4 million, while her business is really worth $1 million (Note: Jane had estimated a $2 million value), she has current investable assets of $1 million, representing an "asset gap" of $2 million.  And again, Jane wants to leave now!

As Jane's exit planner continued to "expose reality" regarding her business readiness for a successful third-party sale, Jane also had to come to grips with the reality of her business not being as sellable as she had assumed.  The planner pointed to a number of "value drivers" that needed strengthening (i.e., EBITDA, capable management team, plan for growth, etc.) to make her business more attractive to either a strategic or financial buyer. 

So, if Jane chooses to sell now and is able to, all indications are that she would not receive a sufficient amount of net proceeds to facilitate her post-exit life plan.  She will either need to begin now to execute a plan to accelerate the value of her business and sell at a later date or significantly reduce her post-exit goals and lifestyle...neither of which are attractive options.  Jane is not feeling at all good about her limitations and lack of control over her current options.  

It is now clear to Jane that it would have been wise years ago to assess both her personal and business readiness and put a plan in place to accelerate the value of the business.  If the business was more sellable and highly valued she would have more options for when and how she exits.

Have you conducted an accurate financial gap analysis including an objective estimate of business value and personal financial plan?  Do you have a plan in place to systematically maximize the value of your largest asset?  Will selling (or not selling) your business affect your future lifestyle goals?  Will it be sellable as more and more baby boomer business owners put their business on the market in the next decade?

Take control of your plan now so that you exit on your own terms and conditions.  Contact us for assistance with any of these critical planning issues.

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.