Should I reject a company where the owners are (too?) close to the customers?
February 08, 2021
by a searcher from Harvard University in Boulder, CO, USA
I am seriously considering a company where the owners keep talking up how strong of relationships they have with their customers. They've been in business for 40+ years and have lots of repeat business (no recurring contracts though).
I am trying to figure out the best ways to assess the risk of customer churn if another owner were to come on board (particularly someone like me, without experience in this construction-tangential space). I'd like to do this risk assessment pre-LOI since I think it has a pretty big probability of being an issue.
Two relevant pieces of information for this company:
- Customer concentration is borderline - top 5 customers make up 22-27% of revenue depending on the year
- The business has a lot of repeat business that recurs every 1-4 years but no long-term contracts (a lot of handshake agreements)
What outcomes would you need to see w.r.t typical customer relationships to be comfortable? I can't come up with any concrete go/no-go decisionmaking criteria... without that, there's really no point in going through the exercise at all.
Does anyone have tips on go/no-go criteria as it relates to the customer/owner relationship?
from University of Memphis in 5000 Linbar Dr, Nashville, TN 37211, USA
1. Most customers and employees are not as loyal to the owner as the owner thinks. This is true in the corporate world and at almost every level of management. The key is are the clients served well, treated fairly, appreciated for their service or business. If the answer is yes the clients are more likely to stay and give the new owner a chance just as Eric shared.
2. I assume there is other staff that interact with customers in their respective roles so understanding the roles & responsibilities of the staff is very important.
3. We agree that transition assistance is critical regardless of the client relationships status but an owner that is stating his or her relationship is critical is less likely to be of assitance in transition and you should be skeptical if they can actually take the step of letting go. Someone that has owned a business for years can be too emotionally attached. That does not mean you should not acquire that business but you must be certain your transition/consulting agreement provides you full latitude to reduce, limit and stop the prior owner's involvement if they are creating challenges for you moving forward.
4. The client concentration you mentioned does not seem like an issue to be overly concerned about.
5. Long-term contracts with clients are very rare today. Multi-year agreements normally include provisions for early termination and if clients are coming back every few years for additional services that may indicate that it is the past performance of the business not the individual that they know there is why they return.
Good luck
from Columbia University in New York, NY, USA
1) Do these repeat customers have an obvious alternative for this kind of product or service?
2) Are there other members of the team that produce value-add, or is the work quality very tied to the owner as well?
3) Is the owner willing to do a customer road show and pass the baton (so to speak) in person?
For #3, in the worst case, you end up with non-compete problems that are very hard to enforce. I have heard a few horror stories about sellers going down the road, pocketing the sale price, and getting all their old customers back. The owner's stage of life could tell you a lot about the risks here. Someone truly retiring is less likely to be a problem than someone "looking for what's next."