My friend’s venture firm incubates, builds and grows tech startups.
He once told me that a huge red flag in the acquisition process is when a company has what’s called a customer concentration risk. Meaning, a significant portion of the organization’s recurring income can be attributed to a single source, and that company runs the risk of losing anticipating revenue at best, and full blown brand extinction at worst.
Check out some of the questions he asks his potential acquisitions:
*Can one phone call from a customer evaporate your business overnight?
*Does one of your buyers have a relationship with a key person that may change?
*Could any of your clients go bankrupt or get acquired?
If so, that’s one hell of a risk. Never trust your business to someone who might not even be in business.
Fortunately, there are ways to mitigate this kind of risk going forward. The most intelligent one is diversifying your portfolio. Not only by having a variety of buyers, but also by building out product and service lines with offerings that didn’t exist one, three and five years ago.
Here’s a great case study. One of my startup jobs was for a company that began as a boutique advertising agency, managing digital marketing campaigns for ecommerce brands. That was their bread and butter for the first few years.
But as their client roster grew, private equity and venture capital firms started reaching out to our executive team to get their help on due diligence and digital marketing execution for their investments and potential acquisitions.
This service was unheard of in the marketing and banking industries, so it became a highly attractive offering that helped diversify and differentiate our company.
Then, about two years later, clients who formerly hired us to run execute their digital marketing campaign, who knew that our knowledge across many industry verticals was unparalleled, asked us to deliver the actual service of creative production. Physically building the ad creative.
After all, who better to make winning ads the the company who has spent hundreds of millions of dollars placing the ads of successful companies?
Yet another offering that helped reduce our risk of customer concentration. It’s all about diversification.
And this reaches well beyond business.
Let’s talk about the bigger issue here, which is loss.
Every one of us is vulnerable to it, whether we’re running a business or not. Could be our relationships, our careers, our finances, our health, our property, there’s no way to tell when it will happen, but loss comes for all of us.
We all have exposure.
The secret is preparing in advance so we can execute when the pressure is on. Think of it as succession planning for various parts of your life.
Who or what are the most valuable things you have?
What would happen if, from this moment forward, you never saw them again?
And what would you need to do to return to normal quickly without them?
It’s heavy stuff. And it might seem absurd to approach your personal life like a business.
But protecting your downside never hurt anybody.
LET ME ASK YA THIS…
How could you protect yourself from being overexposed?