It’s common for a business to be dominated by one or two important customers. It happens pretty naturally.
You do a good job for one customer, and then it buys again. You keep satisfying your customer and it stops looking for other suppliers and starts to bring more and more of its orders to you in the hopes you can handle the increase in business while maintaining your amazing service.
Given its importance, you’re probably also servicing this giant customer personally, which makes it even more profitable because you do not need to hire sales or service staff to support the account. This, of course, makes both the account and your business very profitable. Your elephant becomes a cash cow.
Pretty soon, you have a co-dependency that can undermine the value of your company – and make it virtually impossible to sell.
For example, an acquaintance owns a business that supplies a product to the home improvement chain Lowe’s. In some months, Lowe’s makes up more than half of his revenue – which is why, when the U.S. housing market crashed and Lowe’s slashed the size of its orders and slowed down its payment cycle, my friend’s business teetered on the brink of insolvency.
Desperate for cash, my friend tried to sell his company to both strategic and private-equity investors, all of whom offered him pennies on the dollar (when compared to the value of similar businesses) because of his reliance on just one customer.
To build a valuable company – one you can sell if you choose – you need to decide if you want more profit today or a more valuable business down the road. A cash cow client can be milked for years, but the longer you do it, the harder it will be to sell your business down the road.
If you have your eye on selling your company in the next few years, my suggestion is to ensure no one customer represents more than 15 per cent of your revenue by the time you shop your business.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released in April.