December 4, 2019
In this blog series, we aim to help you unlock unrealized value in your business and go beyond what your business is today. There are always new methods to build value in your business and given the adequate time you can execute a plan to realize it. This fourth blog installment explores your Concentrated Risk.
Few small business owners recognize the major impact customer and supplier concentration has on their business. There is an increased risk to the business when a single or small group of customers or suppliers make up a significant portion of the supply chain or sales. Should the business lose that major customer or if your main supplier suffers some kind of business disruption or shuts down, there is an increased risk of harmful impact on the company.
Factor #4 Concentration Risk
If your business does not have a regular flow of new customers coming through the front door while it keeps current customers from going out the back door, you have a business model problem. Looking at ways to diversify your customer base with new products, geographies or broadened offerings is an important factor in managing clients. It is also critical for your company to continue paying attention to and growing, it’s established customer base. Diversification efforts should not be at the expense of current customers.
Developing a contingency plan and researching alternatives for the loss of a key supplier can be eye-opening. Often new technology or providers can offer better pricing or delivery times than an existing supplier. They might even offer new services or products than what you presently have – this may help generate new markets and expand sales.
While concentrated risk typically focusses on suppliers and customers, don’t forget about other aspects of your business that may not be diversified.
Employees are very impactful to your success. Identify those critical staff members and ensure they stay with you; by formalizing their employment, enhancing their education or skills, compensate them well and possibly offer them a stake in the business. What would you do if they left or could no longer work? Your organization needs to identify and develop one or more replacements for these key individuals and begin preparing them for these potential new responsibilities. This succession training is not a wasted effort, as having employees with broadened capacities enables you to utilize them in other areas. And, if the management team is strong, it may have an interest in working with the business owner to structure a management buyout plan when the owner wants to be less involved or retires.
The Owner is often very involved in the day to day running of the company. This can become problematic when he or she decides to retire or is unable to perform these duties. Often the business begins to fail once this indispensable individual is no longer the driving force behind the success of the organization. The “single owner” is also a significant point-of failure risk, which accounts for small business having low exit valuations and sometimes difficulty of selling. Develop a plan for this scenario and begin to delegate and train current staff or family members to support the organizational framework without the owner. Additionally, as the business continues to grow, the business owner’s personal wealth may become more focused in the business, making wealth-transfer strategies a critical tool for overall wealth expansion. A flexible distribution plan needs to be implemented which allows the owner to withdraw or reinvest as needed.
The salability, valuation, and deal structure of a business-for-sale transaction will be effected by concentration. Determining if a customer concentration and industry concentration exists in a business is an important part of the exit planning process for one very simple reason. When selling a business, the savvy business buyer will determine if one or more customer or industry concentration risks exist and if so, they will discount their offer price.
A diversified business will often have a better chance of long-term survival and, in a sale process, may command a higher sale price.