Today we are continuing our series on “Selling A Manufacturing Business – The Top Five Things Every Buyer Wants To Know.” Today we’re looking at the importance of the size of the customer base in more detail, and why it matters. To review, here are the Top Five:
- What Are the Numbers
- How Big Is Your Customer Base
- Will You Assist With Transition
- Does the Business Have a Unique Product Or Service
- Will The Primary Business Survive
As a Manufacturing Business Broker and Industrial Auctioneer I look at hundreds of businesses each year. I am often asked whether a company is saleable if it is a smaller manufacturing house. My answer depends on a number of factors including the company’s financials and likelihood of continuity. A “small” company is just as saleable as a larger manufacturing company. Basically, there is an “ass for every seat” and I’m an expert at matching buyers and sellers of manufacturing companies. However, when it comes to your customer base, SIZE MATTERS! In fact, it matters a great deal.
There are a number of “whys” to this. First, as discussed in the original teaser article, unless there is a contract in place between you and your customer, there is NO GUARANTEE that the customer will remain with an acquiring entity. Buyers know this and will steeply discount or refuse to look at altogether those companies that have one or very few customers when considering a purchase.
Lets suppose that the relationship between the customer and the buyer of your business is great! Perhaps they have every intention of staying with the buyer as their first choice in parts manufacturing. Their good intention becomes worthless if the economy turns for a specific industry. Here’s a perfect example: I was asked by a bankruptcy trustee to look at a deal in which the manufacturing entity had purchased the business less than a year prior. This place was immaculate, with late model Haas machining centers that I was drooling over. The business had transferred smoothly from buyer to seller with no decline in sales…until the devastating blow, which was a knockout punch. The company’s ONE customer, (who had been golden up until the knockout), made mailing machines for a well-known company. In an instant, the mailing machine company cancelled its relationship with the sub-contractor. Why? How much mail do you send out these days? Do you pay your bills online? Do you communicate primarily through email? So do hundreds of millions of other Americans. The product this company made parts for is starting to become obsolete. They were literally in a thriving business one day and filing bankruptcy the next.
How much of your business should you let one company dominate? I recommend not more than 25%. I realize that some will say “That’s ridiculous, you have to get business where you can!” I would argue that if you are permitting one company to dominate more than 25% of your production time, you are in danger of becoming their slave. Here’s another war story to drive the point home.
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. Have you ever heard the expression, “Owe the bank a little bit of money and they own you, owe the bank a lot of money…and you own the bank.” 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!
Savvy business buyers want to see a diverse customer base when they are considering the purchase of a manufacturer’s business. No more than 25% of your income or production time from one customer.
If you REALLY want to ensure that your customer base is attractive to potential suitors and you are ahead of the competition, start working on the following:
- No more than 25% of your income from one customer. Now I’m not saying to dump customers to fit into this percentage. If one customer dominates right now – GET MORE CUSTOMERS! Actively market your skills and services to new customers.
- No more than 25% of your production time from one customer. Same argument as above, if you’re in that boat now, start working on a life raft!
- Here’s the one that is the juiciest of all. This is the one that buyers drool over. Make your customer base diverse not only in quantity, but over various industries. Why does this matter? It provides safety to a potential buyer. If your company makes parts for the medical, automotive, electronics and telecommunications industries, you will get a second date a lot quicker than the guy that only does parts for printing press machines. And…if that’s all you do – better start looking for a life raft! 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.
In summary, size does matter when it comes to your customer base. Equally important is diversity of industry. You need to be thinking about the growth and survival of your manufacturing company constantly. Even if you are a small shop and want to stay that way. THAT’S OK – BUT JUST KNOW THAT THE SURVIVAL RULES HAVE CHANGED. For more on this and how to have the right plan, see my article on The Seven Irrefutable Laws Of Manufacturing Business Growth – Work On Your Business – Not Just In Your Business.
Next month we’ll take a look at the importance of assisting with the transition to a new owner and how that affects a manufacturing company’s sale price. Until then, remember…Size Matters and Diversity Makes You Highly Attractive!
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.