Reliance on Key Customers
As a valuation expert, we often look for the risks and uncertainties in a business to gauge what effect these may have on future cash flows. One of the key risks is reliance on key customers. We have seen very extreme differences where one client had 100% of their revenue tied up with one customer and another client had a plethora of customers across a range of sectors.
A recent BRW article highlighted how a single customer group can be a strength rather than a weakness.
The article explained how “…90% of JC Fine Foods sales comes from independent food retailers.” Valuation experts see this as a clear competitive advantage in that they have become the leader in a market segment – independent retailers. It is not reliant on a single customer – although it is reliant on a key market segment. If some condition “kills” the market segment then it becomes a problem. But if this is unlikely then the leadership in this key market segment helps reduce the uncertainty on future cash flows.
This does not mean the business cannot pursue other market segments, but with management systems and procedures in place to service the independent retailers, JC Fine Foods has low cash flow risk even though 90% of sales come from one segment.
Reliance on a single customer will always present a risk to future cash flows, if the customer disappears then so does the business. A valuation expert will always discount the value of a business if it’s cash flow is at risk.
However there are some key actions a business can implement to mitigate these risks, which includes:
- Have long term contracts or agreements in place.
- A sales process that does not rely on key individuals.
- Put in place systems to maintain communication with the customer(s).
- Ensure these communications systems can be replicated with new customers.
- Establish processes to communicate with new prospects and acquire new customers.
How does your business rank when it comes to customer or client risk? How is it likely to impact the value of your business?
Find out more how a valuation can guide you to increase the value of your business by decreasing the revenue risk of your business.