Pop runs a “successful” business meaning it has makes lots of money but he’s a “hostage owner.” That’s because Junior was brought in as a salesperson as Pop didn’t want to do that. One day he’s told to call on a prospect who called in and that prospect turned into the businesses’ number one account.
Now, years later, Pop and Mom, who are in their 70s, want to retire but they don’t trust the son to take over. You see, there was that embezzlement issue in Junior’s previous job that’s sort of a sore point. But regardless of how they got there, Mom and Pop are effectively “hostages” to Junior. Any “hostage situation” will drive down the price of the business regardless of how profitable it may be.
But Pop is now 71 and he and Mom need to sell the business for cash so they can retire. Junior doesn’t want it for he’s happy with earning $200k per year working essentially part-time. He just doesn’t want the stress of the whole operation he told me, “For the sake of the kids.” Hum.
So would you buy this business?
Right, Junior may walk away with a significant portion of the business.
For those considering buying into such a situation (I advise don’t), you must deeply discount the price in order to compensate for the huge risk.
Pop runs a “successful” business for many years but has long ago “retired in place.” Essentially he’s given up doing anything but hangs around mainly to “watch the checkbook.”
Just as Bad: Being Hostage Owner to an Account
If you were to consider buying a business with one customer that is more than 20% of your total sales, what would you think? Most buyers would think, “What if this customer goes away?” And therein is the problem.
Undoubtedly this customer is a good one. They pay well, you get good prices and you gear your whole operations sometimes in servicing this one (or a couple) of accounts.
Solution the Same in Both Cases of a Hostage Owner
So what do you do? Tell the big customer to go away? Stop taking Junior’s orders and allow him to walk away with the account?
No, of course you don’t.
You make a concerted effort to grow your business so one customer will represent less of your total business.
You make a concerted effort to sell other accounts or to develop other salespeople so Junior’s account will be less of your total business. There are numerous other things you may do here in sales management but the goal is the same.
This gets us into the whole realm of selling and growth which isn’t our focus in these reports. But realize that either condition could make your business effectively unmarketable.
One company we worked with this month has one customer representing 40% of sales. And one key employee has all the contacts with that account. Now, the shop is a good one with financial strength, growth and good management all except this one thing. Nevertheless, the value of this business will be less than what it could be if it had a more diverse group of customers.
This reminds me of one of my favorite quotes. Al Ries, the late marketing guru, wrote in his book Focus, “The object of any business is to attract and retain customers.”
Once you gain them and are working on retaining them; don’t forget about the need to gain others. Otherwise you may end up as a hostage when you go to sell.
Are you ready to sell?
We do provide on-site valuations of businesses that include an estimate of value as well as include recommendations of “fixes” that will improve earnings and thus value if there are issues there. We also can provide a non-onsite arms’ length estimate of value for planning purposes for businesses if not in need of fixes. These are particularly valuable for owners with three, five or even ten year time horizons. If you are ready, then email me at firstname.lastname@example.org and let’s see where you are.
Do you want to transition to son/daughter or employee?
Fine, does the son/daughter or employee have the knowledge to “run” a business? This is particularly important for many times an “internal” transition requires the seller to finance all or part of the sale. So, you need to assure that you will get paid in your golden years and not have to come back and run the business. The way to do that is to assure your successor is trained. Our CPrint program has helped many prepare successors for business over the years.
If you’d like more information on how our program could help you, please message me at email@example.com