Most business owners dream of landing a prominent blue-chip client. Selling to companies like Nike, Apple, Amazon, or Walmart can be transformational for a business.
Although companies differ, most big brands place larger orders, always pay, are less price sensitive, and provide expansion opportunities.
You can also use their brand to give you a Good Housekeeping seal of approval when pitching other corporate giants.
However, allowing a blue-chip client to dominate your business could result in your company being heavily discounted in the eyes of an acquirer or, in some instances, deemed worthless.
Too much customer concentration is one of the fastest ways to turn off an acquirer. As I’ve learned from producing over 30 Built to Sell Radio episodes, acquirers obsess over de-risking their acquisition. When one customer accounts for a large portion of your revenue, their departure represents an existential threat to your company.
How Acquirers Evaluate Dependency on Your Top Customer
When I started working with John, I thought hearing from a buyer’s perspective could be valuable for founders. Since then, we’ve interviewed three different acquirers: Tony Falkenstein, the founder of a publicly traded company; Touraj Parang, who led acquisitions for GoDaddy; and, most recently, Nathan Winch, the founder of a micro-private equity company. I got to know them on and off the show and learned they all shared the same criteria when evaluating a company: minimal customer concentration.
Having a balanced customer base is just good business hygiene, but it goes from important to critical when selling your business.
When you have a giant customer that makes up the majority of your revenue, acquirers are concerned for two reasons: Obviously acquirers worry about the loss of your blue-chip client on your revenue base, and secondly, an acquirer will assume that given their size, you are the glue that holds the blue-chip client to your company.
An acquirer will therefore attempt to mitigate the potential risk of losing your largest customer by discounting your business and/or tying you into a lengthy earn-out.
If you rely heavily on a single customer, recent Built to Sell Radio guest Chuck Crumpton provides an excellent case study on how to reduce your dependency on a corporate giant.
How Chuck Crumpton Reduced His Customer Dependency From 83% to Under 50%
Crumpton started Medpoint in 2002 to help businesses bring medical devices and pharmaceuticals to market. Early on, he landed a well-known industry giant, which was a blessing and a curse. On the one hand, Crumpton had consistent revenue. However, Medpoint quickly became heavily dependent on their customer.
Motivated to make his business more attractive to an acquirer, Crumpton implemented a three-pronged approach to de-risking his business:
- He moved away from big yet low-margin orders typically placed by procurement. Instead, he focused on selling to business unit leaders, who are less price sensitive.
- Crumpton focused on parlaying his relationship with one business unit leader to another, daisy-chaining his way through the organization.
- He incentivized his sales team with higher commissions to land other prominent brands.
With Crumpton’s three-pronged approach, he reduced customer concentration from 83% to under 50%. That’s when he attracted an acquisition offer for around five times EBITDA.
As a founder of a smaller company, it can be life-changing to land a high-profile customer. Yet if they start to dominate your business, it may be time to diversify your risk.