Management | Build Value by Addressing Customer Concentration

What gives value to your business? There are many aspects; some are things you can control and some are things you can’t. You do not have control over the state of the economy or the trends of your particular industry. However, in the words of the late leadership guru and author Stephen Covey, “control the controllables.”

Let’s examine an area that gives your business value and that you can work on: your customers. As we all know, our customers are the lifeblood of our businesses. Think about yours. Who are they and how many are there? Would you like to have more? From an M&A perspective, if your largest customer accounts for more than 15% of your overall revenues, a buyer will perceive this to be a riskier investment than a business with a more diversified customer base.

In the converting industry, many small companies get their start when employees of a large company decide to start a business to serve the needs of the large company from which they came. The result is typically a heavy customer concentration issue in which one customer makes up 50% – 75% of a company’s overall revenues. This is not a position in which most business owners are comfortable. If you can’t sell more of the same product or service to additional customers, consider diversifying your product/service offering as a means of diversifying your customer base. For instance, if you are already offering slitting/rewinding services, you may be able to add a slitter/rewinder that allows you to target new customers that need converting for different types of substrates.

If you are finding it too difficult to diversify your customer base and grow organically, you can consider acquiring another company to increase revenues and reduce customer concentration. Who would you add as a customer if you had the choice? Find out with whom they are working now. Is there a possibility of making an acquisition there?

These are just a couple of ideas for you to consider that should increase the value of your business now and for a future sale. If you would like other ideas on building value, feel free to contact me for a confidential conversation.

Gary Hermsen is a mergers and acquisitions advisor for Cornerstone Business Services. He has 13+ years of experience in the converting industry as an owner and former owner/operator of a paper converting company and more recently as an M&A advisor to others in the industry. Contact him at 920-436-9890; ghermsen@cornerstone-business.com.


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