The perils of elephant hunting
Are you an elephant hunter? No, I don't mean literally. I mean the metaphorical elephant hunt in business: trying to land the customer that dwarfs all of your other customers. Many small business owners dream of bagging the elephant, for example getting Wal-Mart, Target, or Home Depot to sell their product. There's no doubt that landing such a customer could catapult growth and profitability, but it is also fraught with peril.
In an article in The Wall Street Journal, The Right Way to Go After Big Clients, writer Sarah Needleman describes some of the risks and issues associated with elephant hunting, but she missed one that I'll share from a business broker's perspective. Most business buyers perceive a high level of risk if a single customer represents more than 5-7% of total revenue. While there are attractive aspects of having a large customer, what happens if that customer decides they no longer want to do business with your company? Or what if you have invested in equipment and facilities to accommodate far higher volume from a customer, and then that customer starts demanding price concessions - can you say no without replacing their business? Because of these risk factors, many acquirers will not be interested in buying a business that has a large concentration of revenue from one client. Even if your business broker or investment banker can find someone to buy the company, an earn-out will likely be required where part of the consideration paid will be deferred and dependent on retention of your key customer over time.