Situation: A CEO is concerned that too much of her company’s business is focused on two few customers. The loss of a single large customer can potentially mean a significant hit to revenue and profitability. How do you diversify your customer base?
Advice from the CEOs:
- If current cash flow is good, the company should consider purchasing diversity by buying a company.
- Consider acquiring a supplier that is in good shape, but with lower margins. They will have the infrastructure to run their own operation, and the purchasing company will have the additional profitability to make the combined entity more interesting.
- Given the company’s existing cash generation potential, there are creative ways to finance such an acquisition.
- Why is this a good strategy?
- Purchasing another company can instantly expand the customer base.
- Diversifying the company opens additional options to build long-term sustainability.
- A purchase strategy can bring in a ready-made and smoothly running infrastructure in the form of the purchased company.
- Diversification can boost the value of the combined company on a more diversified business base. It might allow the company to combine low volume, high profit lines with high volume, lower profit lines. There are advantages to each of these business models.
- Where can such a company be found?
- Look both inside and outside of the current geographic base.
- A candidate could be a higher volume but lower profit supplier of one of the company’s current customers that does not compete with the company’s current offering. Alternately, look at companies with more diversified customer bases in a related industry.
- Look at the niches that the company’s current customers serve.
- What similar niches exist? Are there acquisition candidates there?
- Look at the functionality that the company’s products add for its clients. In what other industries would similar functionality be of value?
- As these questions are asked, look for candidates that have complementary customer sets, customer bases, and geographical reach.