This is a particularly important value driver!
Private Equity firms will often discuss the key value drivers of a company, such as Next Level Management (NLM), operational systems, and diversified customer base.
While there are nine major value drivers, Diversified Customer Base (DCB), is one of the most important for maximizing the potential return and value of a company.
DCB, typically is where no single client accounts for more than 10% of the total sales. By doing this, it insulates the company from a loss of a major company. It also stabilizes the cash flow and makes it predictable for future planning.
Any buyer would be concerned if the company they were considering purchasing had 45-55% of their sales in 2 or 3 clients. The purchasers would have a legitimate concern if any of the clients left as it would have a significant impact on the cash flow.
There would also be a concern if the major clients had a loyalty to the key person or owner, and not the business itself. Since there would not be diversification in the customer sales percentage, a future purchaser would see this as a greater risk factor, and one to avoid.
To increase the client base, the company may have to consider other markets, services, and products. Going back to having a NLM team, makes implementing a diversity program much easier, with the focus on creating a larger client base, and not one that is very concentrated on a few clients.
Operating systems that improve and sustain cash flows are a key element in the future value of a company.
It is extremely important that the business has established and standard business procedures which can keep profitability after the business is sold, and without the current owner.
Having the ability as an owner, to show potential purchases, that there are procedures, and that they are procedures that work, is of tremendous importance.
A company would benefit from creating and documenting systems and processes in all the aspects of the business. This ensure consistency of execution or delivery and creates sustainable competitive advantage.
Documenting systems and processes are such a crucial factor in building company value as it creates the ability for the owner to leave their company on great terms and gives them the potential to receive the highest potential value for their company.