Customer, Supplier, & Services Diversity

It seems like everything these days is about race, gender, diversity and inclusion. Well, that’s not exactly the kind of diversity I am talking about here.

When I say customer diversity, I'm talking about avoiding over-reliance on any one customer or group of customers. So, for example, if twenty-five percent of your revenue comes from one customer that is going to make a buyer, and more importantly their bank, very nervous. If you lose that customer, the business might not survive. Ideally, they want to see that no single customer represents more than five percent of your business.

So if you have one client that makes up a large percentage of your revenue, the best thing to do is get rid of that customer. Just kidding! The best thing to do, of course, is bring in more clients so that one customer now represents a smaller percentage of your revenue. But that’s easier said than done. Another thing you can do is look at how you work with that customer. Are you working with several different business units or affiliated companies but using one umbrella billing method? Is there a way to separate that business into different customer files?

The diversity issue exists with respect to suppliers too, but it’s a little different. A buyer is just going to want to make sure there is no supply chain risk due to overreliance on a single supplier. For example, if you are a cabinet company and you get all of your lumber from one place, then there is a risk of a significant business interruption if that supplier can’t deliver in the future. In this instance, you don’t actually have to use multiple suppliers to satisfy the buyer. You just have to show that you could order the same products from multiple suppliers on substantially similar terms.

Finally let’s look at product/service diversity. This is simply the idea of multiple lines of revenue for a company. It is less of an issue than the customer and supplier diversity issues. It is one of those things that can add value to your business if you have it, but it’s certainly not something that would prevent you from closing a deal or would prevent your buyer from obtaining financing.

Jeff Brown is a Business Broker with Business Acquisitions, Ltd. in Denver, CO. He is also a former M&A Attorney and Entrepreneur who has owned, operated and sold five successful businesses of his own. Jeff can be reached at 720-989-4121 or Jbrown@Baltd.com.