How sticky are your customers?

When you’re planning to sell a business, one of the key assets you will be offering is your customer base. This is a major value driver for both seller and buyer and it is well worth spending time analysing your customer base in some detail so that you can fully promote its value and thereby raise offer prices.

Businesses that can demonstrate a good understanding of their available audience and their engagement with it will be much more likely to achieve a good valuation.

Assessing issues and mitigating risks in advance of purchase negotiations starting can make a big difference to the eventual price achieved. We recommend businesses start the process at least two years before they hope to sell.

 

Avoid client concentration to increase value

The most valuable customer base is one where no single client dominates. Ideally no client should represent more than 10% of total revenue. Better still, if you have a variety of customer types, across a variety of industry sectors, the value goes up. This level of diversity protects your business from any reduction in demand because of economic fluctuations within a particular sector.

 

Of course, any buyer will want to be sure that your customers will stay with the new business once a transaction is completed. It will be up to you to provide the factual information that they need to make this assessment and will be critical to the offer price

 

Analyse your customer base to reduce risk

It is a good idea to spend time looking at your customer base in the same way as a buyer. Typically, they would want to know:

 

  • The impact on your business if you lost a major customer.
  • Do you have customer contracts in place with your major customers? Contracted revenues are always preferable. Make sure that these contracts are transferable to new owners.
  • Do you have exclusivity with any major clients and what are the terms of this arrangement?
  • Which customers have preferential pricing that would be difficult for them to find elsewhere.
  • What is the profitability of your major customers? Obviously the more profitable the greater the impact if you lose them.
  • Do major customers purchase a range of products/services from you? If so there is a greater degree of dependency on you as a supplier.
  • How many of your major customers do you personally hold the relationship with? If it’s a high percentage, this needs to be reduced by transferring that to other members of your team otherwise you are unlikely to be able to leave the business on sale.
  • Do you measure customer satisfaction rates? The more you can demonstrate high levels of customer satisfaction, the more likely your customers are to stick with you.

 

Customer retention, particularly of larger customers, will be a major concern for a buyer and everything that you do in advance to allay that concern will benefit you.

Once you enter due diligence your buyer will want to dig more deeply into pipelines, contracts, feedback surveys, churn rates and recommendation rates. By analysing your customer information in advance, you will be well prepared to provide this level of detail. Ultimately it will also save you time and money during the due diligence process.

If you would like to find out more about what’s involved in selling a business, contact us on 0118 959 8224 or email info@evolutioncbs.co.uk.

 

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