The Risk of Revenue Concentration: Is Your Sales Strategy Negatively Affecting Your Exit Plan?

By: Dan Flynn - CEO & Founder of Skyhawk Sales Consultants Inc.

You have worked hard growing your business, building it to produce significant annual revenue. The sacrifices made along the way have been tremendous, but in the end, you know it will have all been worth it because when you sell your business you will be able to retire with a comfortable nest egg.

While this scenario is what every business owner dreams about, the reality is often different as they discover the value of their business is not what they thought it would be. Which means retirement plans must be reassessed. But how can this be?

A good area to start investigating is your current sales strategy as it may have produced results that are now working against you by reducing the value of your company in the eyes of investors. A common trap small & mid-sized business owners fall into is building their business around certain key clients, industries, or products to the point that they become a liability. This is called revenue concentration, how your revenue is distributed among your base, and when one area becomes highly concentrated it becomes a major concern. Why? Think of the adage “Don’t place all of your eggs in one basket.” What would happen to your business if you lost your biggest customer, or if an industry you heavily sold to suddenly declined (e.g., selling kitchen supplies to restaurants during the COVID-19 pandemic)? How would your company weather that storm? Below are some rules-of-thumb to serve as warning signs that you are at risk of revenue concentration:

• Customer Concentration: Revenue from any single customer is ≥ 10%

Revenue from your top 3 customers is ≥ 25%

• Product Concentration: Revenue from any single industry is ≥ 20%
  

• Industry Concentration: Revenue from any single industry is ≥ 25%

The risk associated with high revenue concentration extends beyond just a sudden decline in sales. Your pricing power with a large customer or industry can be greatly reduced should they become aware of their significance to your total annual revenue. And should they leverage this during negotiations, the result can be low profit margins for large sales volume. Further, big customers tend to consume a disproportionate amount of internal resources, distracting your business from pursuing other revenue sources.

All these concerns raise red flags to investors and will be applied to the discounted cash flow valuation method for your business, which estimates your future cash flow. This in turn lowers what they will offer for your company. Additionally, investors may want to share a portion of the risk with you and structure a deal that offers a fraction of the total price upfront while holding back the remainder until certain milestones are achieved. Regardless, all this can have a significant negative effect to your exit plans, possibly delaying retirement.

A well designed and implemented sales strategy will drive revenue for your business today while keeping an eye on building value for tomorrow. Mitigating the risk of revenue concentration should be at the heart of every sales strategy and focus on:

• Diversifying your customer base

• Expanding revenue from existing clients

• Penetrating new markets

• Securing long term contracts

If your business is experiencing revenue concentration and you’d like to learn more about revising your current sales strategy to mitigate the risks and build value to your company please click HERE to visit my website and schedule an appointment.

Dan Flynn, the CEO & Founder of Skyhawk Sales Consultants Inc., is a natural leader and motivator with a 20+ year history in sales leadership and success. Dan has designed and led sales teams from start-up to annual revenue responsibility exceeding $200 million. Most notably, Dan’s success track record includes re-imagining and leading a sports media, multi-platform organization consisting of the Lakers & Dodgers sports networks, as well as NBA & MLB content from ESPN, TNT, TBS, FS1 & the MLB Network. The results were 50% organic growth in year 1 and 28% growth in year 2.

Dan Flynn earned his bachelor’s degree in Business Administration & Marketing from the Leeds School of Business at the University of Colorado at Boulder and is a resident of Hermosa Beach, CA.