Murray Kent paid $40,000 for a four-person electrical conduit fittings business operating from what he generously described as a “crack den.”
A decade later, a private equity-backed acquirer purchased the company for 6.2 times EBITDA. Murray received the entire price in cash, with no earnout and no equity rollover.
Many things had to go right to produce an offer like that. One issue Murray spent years addressing was customer concentration.
When he purchased the business, one customer represented approximately 40% of its revenue. Murray understood that such dependence could eventually reduce the company’s value. Instead of walking away from that important account, he built a larger and more diverse business around it.
That same approach can help accounting firm owners reduce risk without sacrificing valuable revenue.
Why Buyers Worry About Concentration
Business buyers want confidence that a company’s cash flow will continue after the acquisition. If one customer produces 40% of the revenue, the business depends heavily on that relationship.
The customer might change suppliers, renegotiate its agreement, experience financial trouble, or be acquired by another company. Any of those developments could dramatically affect the seller’s revenue.
Buyers may respond to that risk in two ways. First, they may offer a lower valuation multiple. Second, they may change the structure of the deal by paying less at closing and placing more of the purchase price into an earnout.
That structure leaves the seller dependent on the anchor customer’s future behavior, even after the seller has surrendered control of the business.
Accounting firms are not immune to this concern. A firm with one client accounting for a large percentage of annual revenue may look profitable, but a buyer will want to know what happens if that client leaves after the acquisition.
The Wrong Way to Fix Concentration
The obvious response might be to stop serving the largest customer or client. However, eliminating a valuable relationship would reduce the same revenue and profit a potential buyer is evaluating.
Murray recognized that concentration could not be solved by shrinking the largest account. He needed to increase the company’s total revenue by adding more customers.
In other words, he did not subtract from the numerator. He added to the denominator.
The anchor customer continued buying. Meanwhile, Murray expanded into new states, invested in marketing to reach buyers outside the company’s existing network, and hired salespeople whose goals did not depend on the legacy account.
Over several years, the largest customer’s share of revenue fell from approximately 40% to 20%. The customer had not become less valuable. The rest of the business had simply grown faster.
Building Around Your Largest Clients
Accounting firm owners can take the same approach.
A large client can provide reliable revenue, valuable experience, and referrals. There may be no reason to end the relationship. The goal is to make the firm strong enough that losing any one client would not threaten its future.
That might involve:
- Creating a consistent marketing system that reaches new prospects
- Developing relationships with multiple referral partners
- Expanding into complementary bookkeeping, tax, or advisory services
- Serving clients in more than one industry
- Adding recurring monthly engagements
- Training team members to manage client relationships
- Setting growth targets specifically for revenue outside the largest accounts
Firm owners should also monitor concentration regularly. A growing client can increase its share of the firm’s revenue without the owner immediately recognizing how dependent the practice has become.
Revenue reports by client, service, industry, and referral source can reveal where that risk exists.
What Changed for Murray’s Business
By the time an acquirer approached Murray, the company looked very different from the one he had purchased.
It had hundreds of customers acquired on their own merits, a management team capable of running operations without him, and margins a buyer could trust. The largest customer remained the largest customer, but it no longer defined the business.
That helped make an offer of 6.2 times EBITDA possible, paid entirely at closing.
The buyer could reasonably believe that the company’s cash flow would continue without Murray and that the loss of any one account would not destroy the investment.
Murray began addressing customer concentration when he bought the company. The payoff arrived a decade later when the acquirer wrote the check.
Helping Clients Reduce Their Risk
Bookkeepers, accountants, and business advisors can help small business owners recognize and address concentration before it becomes a crisis.
The first step is measuring it. Advisors can help clients calculate the percentage of revenue and gross profit generated by their largest customers. They can also examine dependence on individual products, sales channels, vendors, industries, or referral sources.
From there, the conversation should focus on growth rather than abrupt cuts.
How can the company attract new customers without neglecting its anchor account? Which markets could it enter? Does it rely too heavily on one salesperson, platform, or referral relationship? What investments today could create a more diverse customer base over the next several years?
These questions help business owners protect their companies while continuing to grow.
Concentration is rarely a problem that can be solved immediately. It takes time to build new relationships and revenue streams. That is why the best time to begin is long before a buyer—or a lost customer—forces the issue.
Universal Accounting Center helps accounting professionals develop the technical, advisory, and business-building skills needed to grow resilient firms and provide more strategic guidance to their clients. Call 435-344-2060 to meet with our team and take your next step toward building the premier accounting firm in your area—with these lessons in mind.
