Does Your Business Pass the 15% Test?
What proportion of your revenue did your largest customer represent last year? If the answer is more than 15%, you could have trouble selling your company.
Consider the example of a company we recently saw in Michigan. They’re a supplier to automotive companies. Their largest customer is Ford, which represents 60% of their revenue. Even though the company has had good top and bottom line growth over the last two years, its dependency on Ford is a huge problem.
In the end, the only way the company could be sold was through an earn out, in which the owner gets only a small percentage of money upfront. The rest of it depends on the company’s ability to meet certain goals over time. In this case, most of those hinged on keeping Ford as a customer.
My guess is that when you’re ready to sell, you don’t want to hang around for five years, cow-towing to the whims of a single customer who makes the difference between you getting your money or walking away empty handed.
The 15% test
Your goal should be to reduce your reliance on any one customer to a point where your largest customer accounts for less than 15% of your revenue.
Tim Wise, co-president of Norcross, Ga.-based Advocate Consulting, let us take a look under the hood of his company for this article, even though he’s not looking to sell. Advocate has been growing their top line – almost half of which is recurring – at about 20% a year. That was good enough to take rank 3,061 on the Inc 5000 last year, and the company currently has revenue of about $11 million a year. The Atlanta Journal Constitution ranked Advocate No. 21 on their list of the "Top Workplaces 2012" and Wise himself was recognized by Business-to-Business magazine as one of their Top 25 Entrepreneurs in Atlanta in 2011.
Advocate is an attractive company on many levels, but it’s the diversity of their client base that makes their business so valuable. “Advocate has 400 clients and no one customer represents more than 5% of their overall revenue,” says Stephen Capizzi, a certified exit planning advisor and the president of CORE Business Advisors, Inc., “They’re not overly exposed to any one client and that will make them a safe bet for an acquirer looking to buy a stable company with a diversified revenue stream.”
Less stuff, more customers
If you’re good at what you do, chances are customers will start asking you to do more for them. It’s a slippery slope, and for a while, you may just feel like you are being properly customer-centric. Over time, you may find yourself doing a lot of different things for only a few customers. That’s when you stop being a sellable company and start having a job. Instead of selling a lot of stuff to a few customers, focus on selling one or two things to as many people as you can.
The specialization will help your marketing, allow your employees to get really good at doing just a few things, and ultimately, make your business a lot more sellable when you’re ready to move on.
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