10 May Building Value: Customer Base
Are your customers an asset? They could be a core part of your value to a potential acquirer. But that value is directly related to the strength of your relationship with those customers.
Are your customers raving fans? Do they provide you with recurring revenue? Do you have a strong position within a particular market segment? Is that market segment ripe for the launch of new products and services?
The more questions that you can answer with a strong YES, the more value you will have to a potential acquirer.
What Acquirers Want
Simply put, acquirers want new sources of revenue. They can get that revenue via new products or by opening up new markets for their existing products. If you can provide an entrée to a lucrative new customer base, then you will be attractive to a potential acquirer.
Elements of value:
- Market Position – The larger your share of the market and the more customers you have in the market, the stronger your position.
- Influential or Prominent Customers – The most desirable are large, influential customers to whom others look for industry best practices.
- Repeat Business – Loyal customers are the most likely to consider new products from a trusted source.
- Customer Satisfaction – Measures of customer satisfaction can be a good indication of the strength of your relationships with your customers.
- Domain expertise – When a buyer wants to launch products in a specific market where they do not have expertise, they need people who understand the industry.
Building the Value of Your Customer Base
As an entrepreneur and business owner, you make choices that can have a dramatic impact on the value of your business. You must address the immediate tactical concerns of profitability and satisfying customers. However, if you take a strategic approach, then it can have a significant effect on the value of your business when it comes time to sell.
- Acquire Key Customers – Acquiring large, influential customers is beneficial to both immediate business and long-term valuation. A concerted approach to winning these customers is generally rewarded, both short-term and long-term.
- Establish Long-term Relationships – Demonstrate that you care about your customers’ success and that you add value as a partner. Partners are more valuable than commodity vendors.
- Attend Industry Events – Be visible and establish your brand as a trusted player in the industry.
- Participate in Industry Groups – Help solve industry problems, develop standards, and promote industry growth.
- Hire Industry Insiders – They understand customer needs and have established reputations and connections which can help you grow in the short-term and increase valuation in the long-term.
- Avoid Deal Killers – As attractive as key customers may be, avoid contracts which limit future options. Exclusive deals and perpetual contracts limit an acquirer’s options. If you have to sign a sweetheart deal in order to win a key customer, make sure that there is a limited duration on the deal, limitations on the products that are included in the deal, or there are escape clauses in case of change of control.
Bottom Line for the Entrepreneur
Your customers are a key part of the value of your business, so you should:
- Establish a solid market position with key customers
- Become a visible, trusted player in the industry
- Develop long-term relationships with your customers
- Make sure that your contracts are not deal killers for potential acquirers
In this series of articles, the Austin Dale Group distills some of the lessons learned from our many years as M&A and strategic growth advisors to emerging and mid-market technology companies. We review what acquirers want and how those key factors can have a dramatic impact on the value of a company to shareholders and acquirers.