We are currently performing due diligence on a small manufacturing company. Everything seems to be in good order, and the business is very profitable. Our biggest concern is that nearly 60% of the sales are to just one retailer. There are no indications that there are any problems with this account, but obviously the business would suffer dramatically if it were to lose this customer. What protections can we include in the deal? How should we factor this risk into the purchase price?
Oh boy! Customer concentration issues, especially in the manufacturing sector, make me very nervous.
You'll want to attack this deal from two perspectives:
Assuming that you do your research, and are confident that the business with this one client will continue, your best earnout scenario will be to establish the price and have a holdback of at least 50% dependent upon the business' ability to maintain the client for at least one year post closing. You must also understand that the seller will have some legitimate concerns about this. For example, if you take over and mess up the business, you certainly cannot expect the seller to forfeit the money…right?
Have you determined what is that keeps this client buying the products? Is there anything proprietary about the product?
On a final note, you'll want to evaluate what opportunities exist for you to expand the business. While the current customer concentration issue may not pose a problem, ultimately it will because nothing lasts forever, especially in manufacturing and the trend is to move production offshore.
|Get more expert advice in Richard Parker's How To Buy A Good Business At A Great Price - the most widely
used reference resource and strategy guide for buying a business.
|Richard Parker is the author of: How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.|