Over the years, after experiences with many business owners and their advisors, we tried to identify the best determinates of profitability and the ability to transfer the business. From these discussions and experiences, we identified 8 Key Value Drivers. Of these, knowing your customer, the experiences of these customers and creating products/services that meet, continue to meet and anticipate their needs is critical to both value creation and transferable wealth.
For many business buyers, expanding their customer base is a primary acquisition objective. Whether they acquire a close competitor or a company in a different market sector, most buyers hope that expanded revenues from new customers will justify the cost of their M&A transaction.
If you want to get top dollar for your company, you need to assess — and effectively market — your customer assets to potential buyers. A serious buyer will want to know that your customer base will help it increase penetration in its own market or break into new ones.
In a 2015 KPMG survey, 35% of respondents said their primary reason for participating in a merger would be to expand their geographic reach or their customer base. To drill down to a specific sector, the National Association for Printing Leadership (the commercial printing industry’s trade association) surveyed its members in 2014, asking what they planned to achieve through M&A deals. Three-quarters cited “expand our business and client base,” and most (52%) said they wanted to participate in mergers “to diversify our client base.”
It’s easy to understand why companies are attracted to the idea of buying new customers. Building a customer base is hard and long work, requiring businesses to make major investments in sales staff to initiate relationships and customer service divisions to maintain them. Acquiring a new, possibly lucrative customer base in a single purchase seems a lot easier.
Although it’s possible to market your customer base to buyers in general, it’s easier to sell customers to a buyer whose objectives are known.
If you have a serious suitor, determine whether it views your business, and customer base, as a strategic acquisition that can provide it with growth opportunities, or whether it’s looking to buy assets as inexpensively as possible. Doing so will help you understand the buyer’s plans for your customer list and the premium it’s willing to pay it.
To get a better idea of the value a potential buyer might place on your customers, look closely at:
The condition of your client list. Has the company steadily grown its client base and revenues, or have these numbers plateaued recently? If the buyer shares your market sector, is your company responsible for luring customers away?
The nature of your clients. Does the buyer have a diverse client base in terms of number, geography and type of income? Or is the company overly reliant on a handful of key customers?
Your strategic plans. Does the buyer want to sell new products that don’t interest its current customers? If it’s domiciled overseas, is it looking for a foothold in the United States? Has it attempted to expand its customer base in the past and failed?
Once you know what a buyer is looking for, you can tailor your presentation to its needs — for example, a regional company may want to make a savvy geographic move. In this case, you could emphasize your long-term relationships with your customers.
Also consider how your products and services can help a buyer grow its current customer base. If your buyer wants to rejuvenate customer relationships with products or services that complement its own, highlight those products/services and explain how seamlessly they can be incorporated into the company’s current lineup.
Business buyers want their acquisitions to provide an adequate return for the risk they undertake.
Make your company as appealing as possible, learn about a buyer’s client expansion dreams and make the case that your company can help them come true.