Clients

The composition of your customer base can drastically affect the value of your business. Many buyers specifically look at the strength and diversity of a business’s customers when calculating a value. In this section, I’ll list and describe the key components of a business’s customer base and how they can affect value. 

Customer Base

Does your business cater to a strong, stable customer base – Fortune 500 firms, for example – that exhibits the ability and willingness to pay for your product or service? The stronger your customer base, the higher the purchase price you’ll receive. 

Acquirers of business-to-business (B2B) companies place a high value on relationships with large, established customers. They assume that if your product is good enough to satisfy the needs of these companies, the next challenge will be to scale your business by building a strong sales team and infrastructure. 

Most acquirers view building an engaging product as riskier than scaling a company through sales and marketing efforts. National or Fortune 500 customers also hold a strategic value for certain buyers as these relationships can serve as an opportunity to cross-sell their entire product lines to your customer base.

Blue-chip customers are also valuable in the eyes of most buyers because it’s easier to upsell to an existing account than to establish a new one. For example: 

Intuit, the parent company of QuickBooks, acquired Credit Karma for $7 billion in 2020. By acquiring Credit Karma, Intuit could market its other products to Credit Karma’s 100 million registered users. It’s much easier for Intuit to attempt to upsell 100 million existing customers that already have a relationship with Credit Karma than it would be for Intuit to acquire 100 million new customers.

Potential acquirers may purchase your business solely for the existence of the relationships your company has with well-established customers. The cost to acquire blue-chip accounts is high, and the existence of these relationships can therefore have a tremendous impact on the value of your company.

Customer Acquisition

If there’s a strong product fit between your customer base and the acquirer’s product line, it may be a prudent investment for the buyer to purchase your company solely for the value of your customer base, especially if time and lost opportunity costs are critical factors in your industry.

But customer acquisition cost is a double-edged sword. 

A high customer acquisition cost is good because it means your customer relationships are more valuable. 

For example, if the average customer acquisition cost in your industry is $5,000 and you have 1,000 customers, then it would cost a company $5 million ($5,000 x 1,000 = $5 million) to replicate the value of your customer base, assuming there is no overlap between your customer base and theirs. 

On the flip side, a high customer acquisition cost can be a negative factor because it limits the scalability of your business. The higher the customer acquisition cost relative to the lifetime value of each customer, the more costly it is to scale a business. 

For example, a business with a customer acquisition cost of $50 and a lifetime value of $10,000 would be considered highly scalable, whereas a business with a customer acquisition cost of $1,000 and a lifetime value of $2,000 would not be considered highly scalable. 

It’s the ratio that matters – not the absolute numbers.

Customer Database

A customer database, such as a CRM, is also valuable to buyers. That’s because, as previously noted, the acquirer can market their products to your existing customer database. Selling a product to an existing customer, or upselling, is easier than establishing a relationship with a new customer. 

A robust CRM offers the buyer the ability to roll out their product suite to your customer base. The more information your database contains – such as demographics or other targeted information – the better, because it allows the acquirer to develop more targeted campaigns. 

In the example of Credit Karma, it would be valuable for Intuit to know which Credit Karma customers own a business. Intuit could then develop targeted email campaigns offering those customers a free trial of QuickBooks or other solutions for small businesses. Intuit could also create targeted campaigns based on the user’s credit score. For example, they could offer lines of credit for those with high credit scores, or credit-builder programs for those with low credit scores. 

Regardless, the more information your customer base contains that allows the acquirer to develop targeted campaigns, the more value the buyer will see in the database. Without this information, Intuit would most likely alienate Credit Karma’s customer base if they frequently blasted out non-targeted campaigns to their customers. It would be akin to Pfizer sending emails touting the benefits of Viagra to a group of nuns. 

Critical Mass of Customers

Larger companies prefer that you have a critical mass of customers. A broad and diverse customer base is a strong indication that the quality of your products and services is high, which presents a lower risk to the company.

Customer Concentration

Customer diversity is perhaps one of the most critical factors for buyers. How diverse is your customer base? Is the majority of your revenue generated from just a few customers or do you have a broad base, meaning you’re not dependent on any one customer? Low customer concentration reduces risk for the buyer. If customer concentration in your business is high, buyers may view this as too risky. 

For example, if a substantial percentage of your revenue – let’s say 50% – is generated from just your top three customers, buyers may be uninterested because your income would decline significantly if you lost one or more of those key clients. 

Ideally, no single customer should generate more than 5% to 10% of your total revenue. The higher the concentration of any one customer, the higher the risk to a buyer. This risk is also higher if you have a weak management team that won’t be available after the closing to ensure a smooth handoff. If the customer primarily deals with employees who will stay with the company post-closing, the relationship is less likely to be jeopardized during the transition process.

Customer diversity is one of the most critical factors for buyers when evaluating a business.

Close Relationships With Customers

Do you have any close, personal relationships with any customers that would be unlikely to be maintained once you no longer own the business? Does your business have strong relationships with customers? A buyer will consider the transfer of customers as excessively risky if you have close, personal ties with clients, and less so if those relationships are with your company, not you personally.

Repeat Customers

What’s your customer retention rate? Having many repeat customers reduces attrition for the buyer and improves scalability. A high degree of repeat business from your client base lessens the need to rely on a consistent stream of new customers, which reduces risk and greatly enhances the value and marketability of your business. A customer base that’s less loyal than average increases risk and attrition, reduces scalability, and increases the need to rely on a consistent stream of new customers. The net result is increased risk and reduced returns, which can negatively affect the value of your company. The reverse can also be said – a repeat customer base is a strong value driver for any company.

Customer Contracts

Does your business require contracts with customers? Long-term agreements with key customers reduce risk for the buyer. If such agreements are lacking, important clients may choose to shop elsewhere once they learn of the sale. In most cases, businesses don’t have contracts with their customers, and customers are free to come and go as they please. Long-term contracts are viewed as favorable by buyers and are a major value driver. 

One additional important area of concern is the assignability or transferability of contracts in the event of a sale. This can apply to customer and third-party contracts, such as leases with landlords or vendor agreements. Many contracts don’t explicitly address assignability. This is considered a risk factor if the sale is structured as an asset purchase, and also if the contracts have a “change of control” provision in the event of a stock sale.