“It sure was good while it lasted, revenue of $9 million generating 35% profit margin, that’s how we afforded our lake house, now we have to sell it, too.” Amanda (not her real name) was telling me about the good old days, which weren’t all that long ago. She and her soon-to-be ex-husband had started the industrial component distribution business right after the ‘09 recession. “We didn’t have anything to lose, she told me, “we were both manufacturers reps who lost our jobs, so we just started our own rep firm. We morphed into a full-fledged distribution business, and that’s when we hit our stride.”
Though only in her late 30s, Amanda had the experience of someone closer to retirement age. After the business was launched, the economy took off and their little business ballooned to annual revenue of $9 million. Four years in a row they had operating profits greater than $3 million. They were living the good life, even buying a second home on a beautiful lake two hours south of town.
“In a weird way, it seems the business problems started when we bought that darn lake house,” holding back tears as she spoke, “he started going there on Thursday nights to work on the remodeling, our client contact stared to suffer.”
I didn’t fully appreciate what she meant until the next meeting when Amanda showed me her company’s customer list. A key element of a business’ valuation is the breadth and stability of its customer base. That is how we determine the size and certainty of a company’s future revenue stream, which is the basis for its valuation. I quickly figured out the problem in Amanda’s business. In the good old days of $9 million revenue, 60% came from one tier-one supplier to the Volkswagen plant in Chattanooga. Nice work, if you can get it. But in 2015, that supplier changed its CEO, and the new guy had a pre-existing relationship with an industrial distributor in North Carolina. Almost overnight, Amanda’s business went from $9 million to $4 million a year. They weren’t making much profit, and now they needed to sell the business as part of their divorce settlement. Bad timing.
How do you sell a business in this kind of free fall? It’s akin to catching a falling knife; the chances for a good outcome are slim. I told Amanda she was not likely to receive much value from the business so soon after the loss of this big client. She had two choices: not sell for a while and try to re-establish revenue momentum or sell to someone who would employ her to rebuild the revenue. She wasn’t keen on either approach while simultaneously facing the personal struggles of her family coming apart.
Customer concentration is a good thing, while you have it. It might even get you a nice house on the lake. But it’s the equivalent of swinging on a trapeze without a net. A good show, but the fall is painful, maybe even disastrous.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.
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