Customers: who they are, how concentrated, and whether they'll stay

The short version

• Customers are much of what you are paying for. Check who they are and whether they will stay.
• Look at revenue by customer for three to five years. Watch for one customer, or a few, bringing in a large share.
• Read the key customer contracts. Check whether they can transfer to you.
• Ask how customers found the business and whom they deal with: the owner or the team.
• If you speak with customers, do it late, with the seller's permission and a careful plan.

What to look at

• Revenue by customer, by year. Customers are often shown as codes until late in due diligence.
• Concentration: what share your largest customer, and your top five, represent.
• Retention: how long customers stay and how many renew or return.
• Contracts: terms, renewal dates and whether they need consent to transfer.
• Pricing: when prices last changed and whether they are in line with the market.
• Trends: customers growing, flat or shrinking.

Concentration risk

If one customer brings in a large share of revenue and leaves after you buy, you lose a large share of the earnings you paid for and may struggle to repay the loan. That does not always end a deal. It may call for a lower price, a longer handover, a contract signed before closing or a rebate tied to that customer.

Who holds the relationship

If customers deal mainly with the owner, plan how those relationships will transfer. A seller who introduces you personally, during a handover period, makes a large difference.

Talking to customers

Customer calls are sensitive. A clumsy conversation can lose the customer before you own the business. Most buyers speak with key customers only near the end of due diligence, with the seller present or approving, and framed carefully.