The value of a diverse customer and supplier base

When selling a business, diverse customer and supplier portfolios are sought-after assets. Over-reliance on a few customers or suppliers is a major concern and makes buyers very wary. Businesses achieving the most profitable sales are ultra clear on their key customers and suppliers and what it means for future success. This understanding has become essential in our current economic climate.

In this post we explain why a varied client/supplier portfolio is a valuable business asset when selling your business, the benefits of building diversification, and some simple steps to help you get there.

What is diversification?

From a client perspective, a diverse portfolio means your customer list comes from a variety of sectors, locations and industries. In the business-to-business world we focus on size and sector, while in business-to-customer scenarios its more about varying demographics and segments.

When we talk about suppliers, diversification is about building access to a range of resources and knowledge in different locations. For raw material suppliers, you also want to verify that your suppliers aren’t all dependent on a single source.

Why is diversification important in business sales?

When we think of factors that drive business value, having a diverse customer and supplier base is one subject vendors and buyers can agree on. Diversity builds business resilience by reducing dependency on a single supplier or customer. It also generates stronger financial performance, which equates to a higher market valuation. Good news for vendors and buyers alike.

The more reliant your business is on one customer or supplier, the higher the risk. For example, if you rely on one delivery company to distribute your products and that company falls into difficulty, how would you continue to serve your customers? Diversification is part of good risk management strategy.

Buyers are looking to buy businesses with a diverse customer base and stable vendor relationships. Diversification creates flexibility and makes it easier to adapt and reach new markets in the future.

Benefits of a diverse customer base

• Resilience in an unstable economy: a diverse customer portfolio builds strength and resilience in the face of external threats. Every business faces challenges it cannot control, such as interest rates, exchange rates, energy costs, business rates and tariffs. Having customers in various sectors and countries may help to weather the storm if you face market restrictions or have to withdraw service from a country.
• Builds strength against adversity: If your business is dependent on one or two customers for the majority of its turnover and you were to lose one of these customers, it would be difficult to fill the void quickly. A diverse customer portfolio helps maintain business performance and spreads risk.
• Opportunities to increase revenue: the broader your customer base, the more opportunities you have to increase turnover and profitability, now and into the future.
• Improved cashflow: when you have a varied customer base, one customer failing to pay an invoice is unlikely to prevent your business from paying its bills and salaries.
• Help buyers gain access to funding: from a buyer perspective, lenders view diverse businesses as less risky investments, which may increase its attractiveness.

Benefits of a diverse supplier roster

• Access to knowledge and expertise: engaging with a range of suppliers provides access to varied expertise and information. Supplier innovations could enhance or expand your customer offer and create business growth.
• Achieve the best prices: when you have a range of suppliers to choose from, your business is less susceptible to price hikes – you can quickly and easily source elsewhere.
• Increased resilience: similarly to customers, supplier diversification spreads risk by reducing dependency on one or two suppliers. For example, if your main supplier of raw materials fell into financial difficulty or was struggling due to economic turmoil, you would simply switch sources and not have to halt production.

How to diversify your customer and supplier portfolio

– Analyse income and expenditure

Are you too reliant on one or two customers for regular income? Do you spend too much with a single supplier? Take time to review and identify the biggest culprits and the risks they present.

– Track customer behaviour

Monitor customer activity over time to understand the average value and length of contract. Profile the type of customer you would like more of and create a marketing strategy to attract them and grow your portfolio.

– Listen to customer feedback

Are customers asking for additional or complementary products and services? Could you adapt or improve your offer to attract a more varied customer mix and/or enter new markets?

– Build relationships with suppliers

Maintaining positive supplier relationships can lead to diversification opportunities. To stay competitive, keep existing suppliers close and be open to linking up with new providers.  

– Consult a business broker

You might think managing a diverse portfolio is time-consuming and admin-heavy. In fact, with the right processes and procedures in place it doesn’t have to be. A business broker can help you kick-start business growth and build value through diversification.

We help buy and sell businesses

Diversification is an effective risk management strategy to protect your business and enhance market value. Business Partnership brokers have extensive experience working with vendors and buyers to identify opportunities to add value and reduce business risk. Find and make contact with your local broker here.

For vendors, branching out into new sectors and industries is a credible growth strategy you can pursue to increase business value. If this isn’t a road you intend to travel, you can still research the possibilities and pass this on as an attractive part of your sale package. Either way, it makes complete sense to analyse and expand your customer and supplier portfolio with a view to identifying gaps in the market and driving business growth.