The Hidden Valuation Villain: Owner Concentration

The term "customer concentration" is quite common — it occurs when a company has a few key customer accounts that generate a high percentage of the company's revenue. The same concept can occur from the opposite perspective when a business owner generates a high proportion of a company's revenue.

When preparing to sell your business, numerous factors impact your valuation and attractiveness to potential buyers. While revenue, profitability, and growth metrics often take center stage, customer concentration is often a hidden villain in the sale of businesses. This hidden valuation killer can dramatically reduce your business's selling price or even prevent a sale altogether.

What is high "Owner Concentration?"

What Is Owner Concentration?

Owner concentration occurs when a disproportionate amount of business value is tied to a single individual — typically the owner. This occurs in several ways:

• The owner serves as the primary salesperson generating most revenue

• Key client relationships exist exclusively with the owner

• Critical operational knowledge resides solely with the owner

• The owner performs multiple essential roles within the business

A Real-World Example

Meet Bob, the CEO of USA Widgets based in Madison, Wisconsin. While Bob owns the company, he is also the #1 salesperson, generating 30% of the company's revenue. 30% is a huge chunk that puts him into the high owner concentration category. Buyers are understandably hesitant when they see this type of dependency.

Why Buyers Fear Owner Concentration

From a buyer's perspective, owner concentration represents significant risk. When an owner with high concentration exits the business:

• Revenue can drop dramatically (sometimes 30-40%)

• Key client relationships may deteriorate

• Operational efficiency might suffer

• The business model itself could be threatened

Buyers need assurance that the business's revenue stream isn't solely dependent on the departing owner. They're purchasing future cash flows, not just historical performance, and need confidence those cash flows will continue after the transition.

The 10% Rule: A Practical Guideline

As a general rule of thumb, if you're an owner with significant customer relationships, we recommend keeping your customer concentration below 10%. This means no single customer (or group of customers exclusively managed by you) should represent more than 10% of your total revenue.

Strategies to Reduce Owner Concentration

If you're planning to sell your business in the next couple of years, consider implementing these strategies to reduce owner concentration:

1. Delegate client relationships: Introduce team members to your key accounts

2. Document processes: Create comprehensive Standard Operating Procedures (SOPs) for all owner-dependent activities

3. Develop a leadership team: Train others to handle critical business functions

4. Gradually reduce your operational role: Step back from day-to-day operations

5. Diversify revenue streams: Reduce dependency on any single product, service, or market segment.

The Bottom Line

High owner concentration doesn't make a business unsellable, but it will likely impact valuation and may limit your pool of potential buyers. By recognizing this issue early and taking proactive steps to reduce owner dependency, you can significantly enhance your business's value and attractiveness to buyers.

At Collaborative Commercial Business Brokers, we help business owners navigate these complex valuation factors and prepare their businesses for maximum value at sale. If you're concerned about owner concentration in your business, contact us for a confidential consultation.

To your success,

Jason Huett Business Broker | CEO Collaborative Commercial Business Brokers, LLC.