Last month I wrote a blog about how to avoid losing key staff when buying a business.
In this blog I'm sharing advice on how to manage another critical risk when buying a business: customers and suppliers.
This risk relates to key customers and/or suppliers taking flight from the business you’ve purchased in the early stage of the transfer.
In doing your due diligence it’s very wise to look at both supplier and customer concentration risk.
Where you have a significant concentration of one particular supplier or customer, you should try and protect against that risk.
How to protect yourself
Here’s an example of how purchasers can use a ‘hard’ provision in the final contract:
The business has five major customers. Customer A is responsible for 60% of sales. Customer A spent $1.5 million on average for the last three years with the business.
The provision in the contract allows the purchaser to hold back in trust 20% of the purchase price of the business for 12 months and pay this on the basis that Customer A’s sales level, for the first 12 months after transfer, does not fall below $1.5 million.
That is a ‘hard’ measure and it’s up for negotiation – some vendors will accept such a provision because they are prepared to back their business, where there is a big risk around concentration of customers.
Other vendors will not, as they will cite that they are no longer in control of the outcome.
It’s then a matter for negotiation. Try and achieve a fair and reasonable win-win compromise. If that smells commercially sound, then you have mitigated the risk – to the extent you can.
A ‘soft’ means of protecting against this risk would be to agree on a very detailed transition and relationship transfer process between the current owner, the important customers and the new owner, for e.g. joint introduction meetings and a phased handover process with old and new owners involved.
JPAbusiness offers a range of services for business buyers, including:
- Business finder services
- Valuations and market appraisals
- Custom due diligence
- Purchase negotiations support
- Transition and business planning support.
For more information about our services or for a confidential initial discussion with a member of our business advisory team, contact JPAbusiness on 02 6360 0360.
James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.