by Dave Driscoll
I was catching up with a friend from my previous industry (envelopes) this week, and we began to talk about the days when the rising tide truly carried all boats to profitable waters.
We reflected on how we felt like rock stars seemingly incapable of making wrong decisions. Business was growing and clients were ordering more product, which gave us the confidence to order more equipment, hire more people, add on or build new buildings. It was hard not to get swept up in the feeling that we had finally figured it out after years of struggle.
Because we were sales- and marketing-oriented individuals with a healthy dose of entrepreneurial ability, the growth we experienced was a real ego-booster. We mirrored the growth of our customers by making long-term investments in those relationships with capital expenditures. One after another, the capital investments in capacity paid off and created the confidence to add even more. Equipment lead times were measured in years, so for us to continue to grow, the equipment pipeline needed to be full to satisfy anticipated future customer demand.
Life was good – really good.
There is a caution in business: Limit your concentration of business in one single client to no more than 10%; the lower the better. In that heyday, my company had about 700 accounts, with the top five or six representing 35 to 40% of the business and a large number of smaller customers spread over diverse industries. I felt secure that we did not have a customer concentration issue.
I have a saying: When you are feeling really good – duck! Read on to see a demonstration.
A new building was in the planning and the business was continuing to roll. We also planned to add manufacturing capacity. The overall strategy was to position the business for the long run – at least for the next seven to ten years.
As the building construction was under way and we were six months from moving in, the ground started to shift. And I don’t mean the literal ground that was being moved by the backhoes. One by one, my largest accounts began disappearing because of mergers that resulted in headquarters relocations and loss of vendor relationships. Many of my customers were simply gone over the next two to three years.
DIMAC, the largest direct mail producer in the Midwest, was sold to a direct competitor of my company. Sterling Direct, another direct marketing producer, was sold to an out-of-state company. Boatmen’s Bank was sold to Bank of America, A.G. Edwards to Wachovia, then to Wells Fargo. Southwestern Bell moved out of town, and General American was sold to MetLife. Several more large financial clients also merged with out-of-town partners, moving their headquarters to other states.
Over the next several years, revenue declined 40%. I sold the business within eight years of moving into the new building. The decline in business and the stress it created were just too much. At the end of the day, I had to admit that my enthusiasm for growth outgrew my experience.
Lesson learned: Appreciate your customers and do all you can to keep them satisfied with exceptional quality, service and commitment to excellence, yet ALWAYS remember that if you build your house on a small number of clients, they have the ultimate control of your business. Even if you don’t believe you have a concentration issue, think through a “what if” scenario because “what if” can happen (and usually does).
Dave Driscoll is president of Metro Business Advisors, a mergers and acquisitions business broker, business valuation and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.
Submitted 7 years 309 days ago