There are many types of businesses in which the business owner or one of his/her employees is bidding/quoting for contracts. It’s exciting when a large contract is awarded and often times, the business revenue jumps tremendously which in turn provides a dramatic increase in net profit to the business owner. What happens when the business owner is trying to sell the business and the large contract has run its course?
It can be difficult to determine the value of a business when 60% of the revenue was derived from a single client contract and that contract is out for rebid. Perhaps the company will be lucky enough to land the contract again. Perhaps they even have priority over other bidding vendors. However, to a buyer, there is a very high probability that the business revenue will drop by 60%. Buyers are typically interested in mitigating their risk to the highest extent possible. If the total revenue drops by 60%, what does that do to the overall profitability of the company? Will the remaining revenue be sufficient to handle the fixed overhead?
There are other implications as well. What about staffing? If 60% of the revenue disintegrates, is the company now over-staffed? Are there employees that will have to be let go? What about the business premises? Does the company end up with a space and with equipment that is substantially underutilized?
As a business owner, when you land that large contract, congratulate yourself and get to work on it. And, get to work on bringing in new clients and additional jobs to spread the revenue. When any client or any contract generates more than 5% – 10% of the gross revenue for your company, look at that client or contract as a double-edged sword and make sure you don’t end up bleeding.