Not From Concentrate!
Client concentrations may be the curse of M&A transactions. They cultivate uneasiness with buyers due to the potential loss of revenue, and raise significant concerns with major lending institutions. If a substantial percentage of a business’s revenue is generated by a limited number of clients, buyers tend to have apprehension regarding future cash flows and withdraw from a potential sale. In my experience, it has always been difficult to turn away business in order to balance uneven client concentrations, especially in the start-up and growth phases of a business. However, business owners may prevent a future potential deal killer and value reducer by identifying the issue, knowing the long-term effect and solving the problem over time, including:
- Focusing on profitability rather than revenue from a large client; the risks taken with high concentrations should be rewarded with greater profitability;
- Developing strategies to mitigate client concentrations: set goals for reducing the percentages, increase sales to other clients;
- Considering an acquisition; and
- Entering new markets, begin diversifying revenue as quickly as possible.