It is our view that an understanding of who a business’ customers or clients are and the risks associated with the business’ customer or client base (like the risks of customers not paying invoices or clients ceasing to engage the services of a business) should be understood as part of due diligence.
Understanding Customer Concentration Risks
Business’ that have a few customers that contribute heavily to overall revenue are riskier than those businesses with a broader set of customers that more evenly contribute to revenue.
Noting the above, we encourage potential acquirers to consider the revenue contributions of clients to the subject business, with an aim to:
- Understand the risks associated with some clients who may make large contributions to revenue, and;
- Understand the potential growth available from increasing revenue contributions from smaller clients.
Specific Customers and their Risks
It is quite common for different customers of a business to have different risk profiles. Hence, it is vital to understand the risk profile of individual customers, particularly those customers who make significant contributions to a business’ revenue.
In understanding the nature of key customers, we recommend at a minimum:
- Reviewing customer contracts (with particular focus on important terms like termination clauses);
- Understanding who in the business holds the primary relationship with major customers, and;
- Assessing the timeliness of payments made by each key customer.
Product and Service Warranties
Product and service warranties can represent a future burden to businesses in terms of both lost time and money. Hence, we advise clients to understand the risks associated with this matter.
As part of assessing this risk, we recommend:
- Reviewing the history of warranty claims historically;
- Understanding the historical cost of warranty claims, and;
- Making a thorough assessment of the risks of future warranty claims.
At The Quinn Group we have significant expertise in providing clients with due diligence advice, with this advice incorporating the consideration of customer risks. Clients are encouraged to reach out to us by calling (02) 9223 9166 or submit an online enquiry if they are considering acquiring a business and require due diligence advice.