In our continuing series on The Seven Irrefutable Laws of Business Growth, we’re taking a look this month at the importance of diversification of your customer base. I’ve also looked at this issue as part of our series on selling a manufacturing business because it is one of the primary things buyers of manufacturing companies look at. Last month I promised to make the point with some stories, both good and ugly. So, grab a coffee, (or a beer), and let’s get to it!
More than a decade ago I was called into speak with a machine shop owner who had lost his primary customer. The business was in sharp decline and he wanted to discuss his options. He was a brilliant machinist who made parts for the aerospace industry. The same order flooded in year after year and life was good. After a while, the company started making “extra” parts so that when the main customer called in an order, they could ship it the same day. Thousands of extra parts were made and the company had quite the stockpile. Then, the technology for which these parts were made changed because the product had been re-designed and modernized. In an instant, thousands of parts were worth only the price of the metal they were made with.
The shop owner insisted that I find someone to “buy” the parts and his “business,” which included all machinery, tooling and real estate. With very little research I found that the parts were obsolete. In a heartbeat this man’s business was gone because he had one main customer from whom a majority of his work came from, the business was doomed. It was doomed because the owner did not want to put forth the effort to find new customers, AND was, and still is, stuck on selling his parts inventory before moving on with other plans. On a side note, if you are ever in this type of situation, do yourself a favor and LISTEN to all your options and get professional advice. This story could have had a really happy ending. Why? The piece of real estate, (at the time), was worth almost a million dollars! My advice was sell the real estate, auction the machines, and scrap the parts. A decade later, the shop owner is still waiting for someone to buy “everything.” The result? The real estate declined in value about 30%, the machines have aged a decade, the parts are still sitting on the shelf gathering dust and the shop owner has been out of pocket for a decade of real estate taxes and insurance.
Here’s another nightmare story to drive my point home. I got called into to look at an auction deal where the company had just filed bankruptcy. I thought this was strange because the current company owner had just bought the place three months prior. The facility was modern and immaculate. Like new Haas CNC mills were lined up like diamonds. I couldn’t help but ask the bankruptcy trustee, “what the hell happened here?” The company had one, yes ONE customer, Pitney Bowes. They made parts for one of PB’s mailing machines. They got a call one day that the product for which they made parts for was being discontinued. They filed bankruptcy a short time thereafter. Here’s my “side note” on this one, NEVER buy a business that has only one customer, unless you are paying next to nothing.
Here’s another one for you. I’ve told this one before, but it fits here so I’m sharing it again. Back in 2011 I was marketing a gun barrel manufacturer, which we successfully sold. This company was a startup with only two years under their belt. They had a great product that was in high demand. Some of the biggest players in the industry were ordering from my client and continuously demanding larger and larger orders. He refused to let these large companies take up more than 25% of his production time. He reasoned that they would “own” him if he permitted that to happen. At the same time we were marketing his company, a rival company went belly up. How? One of the SAME companies that was ordering from my client, was ordering from this company as well. Each time they wanted more, he provided, until they were almost 100% of his business. The problem was, they were incredibly SLOW PAYORS. They owed him so much money that they were in control. He had given up his other customers to accommodate them. In the end, their slow bill paying time crushed him. In the meantime, most of the business he had turned away to take care of the “one big boy,” went to guess who? My very smart client! My side note here? The fact that no one customer was more than 25% of his income, helped us find an appropriate buyer for this guy’s business.
My industrial auction archives are filled with the files of companies that failed because there was no diversification of their customer base. The failure of one large customer caused a domino affect. My bank account is filled with commission that I received from successfully selling manufacturing companies that understood the importance of diversification. So for the safety and continuity of your business, DIVERSIFY. That means across industries as well as not letting one customer take up more than 25% of your production time or become more than 25% of your income. We all want to retire sometime, and potential buyers drool over companies that get this! The key is to be working in a variety of industries, so that if one industry is hit hard by the economy or technological changes, there is still a likelihood the company can remain strong.
Next month we’ll be wrapping up this series with a look at expansion through acquisition. Where will we go next? Help me decide what to write about next by taking our poll, or simply comment below. Our goal is to help our manufacturing customers and clients protect and grow their businesses. Here are some subjects we’re considering.
- Breaking up is hard to do – What to do when your business partnership is no longer working.
- Divorce and small manufacturing companies. Can your business be protected? How about a look at lifetime alimony – is it fair and how is it affecting the industry?
- How can small to medium size manufacturing companies find new customers?
- To patent or not to patent – the dangers of both.
- Funding – how to get it and what to be careful of.
That’s just a few things we’ve got cooking! What do you think? Anything stand out on my list that you’d like to hear about first? Spout off and let us know!
Fran Brunelle is an industrial auctioneer with almost 20 years experience, a manufacturing business broker, licensed real estate broker specializing in industrial properties, a real estate auctioneer, certified appraiser and author. Fran has established several corporations that provide services to the manufacturing industry. The “Accelerated Group of Companies” provides tools and services to help manufacturers grow and exit strategies to maximize dollars when they are ready to retire or sell their manufacturing business. The group of companies that Fran Brunelle has established includes:
www.AcceleratedBuySell.com – Provides Online Industrial Auction Services, Used Equipment Auctions, Capital Equipment Auctions, Plant Liquidations, Industrial Plant Cleanout Services, Used Machinery Location Services, Certified Machine Tool and Equipment Appraisals, and more.
www.AcceleratedMfgBrokers.com – Specializes in Manufacturing Business Brokerage and Mergers and Acquisitions. We help manufacturers develop exit strategies to maximize retirement dollars, and successful manufacturers expand through acquisition of other manufacturing companies, product lines and customer lists. Manufacturing Companies for sale throughout the United States are listed on this site.
www.AcceleratedRE.com – Provides Industrial Real Estate Brokerage Services, Online Real Estate Auctions, Sealed Bid Real Estate Auctions and complete industrial facility cleanout services.
www.IgniteMfg.com – Provides funding for products made in the USA, and engineering/manufacturing educational needs through Crowd Funding.
www.MfgWebSolutions.com – Provides web development and social media services for manufacturers at under-market rates.
Fran Brunelle is a contributing author to:
blog.AcceleratedBuySell.com - A site that provides the latest manufacturing news, statistics and opinion. It also provides information on how to grow a manufacturing business, and what to do if you are a manufacturing company that needs to close.
MFGWebSolutions.com/blog - Provides the latest information on social media and web development for manufacturers. It gives manufacturers tips and tricks for boosting their web presence.