When 1 Is More Than 1

prepare to sell your business 2

When I graduated from my first faculty, I worked in an Austrian firm, managed in Romania by a leading team from Hungary. I must have shown that I liked them or did something well because after a while they suggested that I offer a course for new collaborators.

I was extremely intimidated by the eighty or so people in the conference room where I was going to give the first course. All the more so as the professional training of those people, their age and their life experiences were much more advanced than mine. The bosses probably noticed that I had experienced some emotions before entering the room. One of the top managers invited me to a table to talk for a few moments. He said to me, "Feri, would you be afraid and feel intimidated if there were only five people in that room?"

"I think not," I answered.

"Maybe so," he replied. "Proportionally one person out of 5 means a 20% percentage. Everyone looks around, sees there are only four other people and he knows he is a very important person for you. He is 20% of the total ... That would make it very difficult for you to control him if he would continue to comment on the course and try to prove he knows everything better than you. But you're lucky enough to have over 80 people in the room. The share of one person is almost 1%. Now he will look around himself and he will know that he will be seen as just one of the many. And you can silence him very easily if you have any problems. So your advantage is to have as many people in the room as possible. And one more thing: no matter who is in that room and what training or experience he could have, you are the most informed, the most experienced person in the room on your subject. No person in the room knows more about your subject than you. "

It's been 20 years since then. Maybe I do not remember well all the words. But these were the ideas I received at that time, at the Continental Hotel’s lobby from Oradea. And those words proved true in many other situations. To finish the story: those words greatly increased my confidence, and the course, like the courses that followed, had been unexpectedly successful. At least for me.

But let's get back to preparing your business for sale.

Buyers are afraid to invest in businesses that have only a few very large, very important customers. You would likely be afraid for the same reasons. There is a major risk of losing even one of them. Let's take the example of a hypothetical business that has two very important customers with a share of about 35% each and a lot of very small customers making the remaining 30% of the production. To increase the power of this example, let’s suppose that this business is yours. The two big clients are aware of how important they are to you. But perhaps for them you are just one of the many that they can easily dispense. This causes great pressure for you. Not just because there is a great risk of cessation of collaboration with one of the two big ones, in which case your business may even go bankrupt, but also because they regularly press to negotiate and re-negotiate the price as well as other conditions.

As a result, it is normal that you want to sell the business. But would you like to buy such a business?

Perhaps it is not an example so far from reality because we rarely realize that we are also in a very similar situation.

What can you do in such a situation?

First of all, you were not supposed to be there. But it is hard to refuse a very large contract, even if it means giving up some of the existing small customers.

Secondly, it is very good to be aware of such a danger in order to take the necessary measures in advance.

A good solution might be to look for new customers–as many as possible. Search for various other distribution channels. Then increase your production to honor your orders. If you cannot increase production at that moment, buy the quantity you lack from your competition, but produce it under your brand. If in the meantime, one of your two large customers does reduce their order, you will have other small orders with which to replace them. If not, you will need to think about solutions to expand your production capabilities.

Maybe this isn’t the ideal solution or the one you're looking for. It may be very difficult to apply this to your specific business situation. And if you have just one year to prepare your business for sale, it will be even more difficult for you to achieve this. But being in the prior situation, it will be hard for you to sell your business. And if you manage to sell it, most likely the price you receive will not match your expectations. In addition, buyers will want to give you a small percentage of the money you have negotiated for your business and the rest will be in the form of payments staggered over many years, and only if you and the business achieves some performance indicators. Yes. You read that right. Because you are supposed to have a very good relationship with your two big clients, you will not be able to leave the business. You will remain captive in it for a few years to make sure those account stay put. Plan on staying at least until the buyer finds a lead person able to take over your part of the business or until your business's dependence on the two big clients has been reduced.

It does not look like a bright future ... So you really do not have time to lose.

This is why professional buyers (private equity firms in particular) will downgrade businesses that have even one customer that accounts for at least 15% of their turnover, considering them risky.

Perhaps that was an extreme, tougher example. I figured it is better to use such an example to better emphasize the idea.

To be sure you are not in a similar situation, ask your sales colleagues to list your main customers as well as their percentage – this will tell you the story, but I'm sure you already know all that data.

And if you see that one of the customers is approaching 15% of your sales... I'm sure you'll know what to do.

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