Retaining the Customer Base After the Business Sale

Retaining Customer Base Critical to Valuation

The retention of the customer base by the buyer after purchasing a business is perhaps the most important component of many business deals. Since the valuation of virtually all businesses is predicated upon its future cash flow, the buyer must be assured that the future cash flow – and by extension the customer base – will not be impaired by the disruption of the sale. The smooth transfer of the customer base can often be accomplished when the seller provides the buyer with a free training period (usually 30-60 days) after the sale. During the free training period, the buyer may be introduced to key customers in order to give assurances that their level of service and pricing will remain the same. Business owners should be aware that a buyer will generally not pay a premium valuation without tangible assurances that the customer base will remain intact after the closing.

Delegate Customer Relationships Prior to Selling

A strong way a business owner may assure a buyer that the future cash flow and customer base of a business will remain fully intact after the sale is by delegating customer relationships to management and staff members prior to the sale. Properly delegating customer relationships may take years of preparation but is well worth the cost and effort when it comes time to sell. Even with a free training period, many buyers will fear the loss of a significant number of customers if the seller is the reason why customers frequent a business. The business owner should attempt to remove himself or herself from personally interacting with customers by training or hiring management or staff members to assume the relationships. Reducing the level of owner-dependency is often the best way in which a business owner may increase the value of their business.

Gradual Changes to Business Model

A buyer who wishes to make changes to a business should generally exercise caution and only make changes gradually several months after closing. It is usually best for the buyer to first fully understand the business and operate it for a lengthy period of time prior to instituting any major changes that are likely to scare off part of its customer base. If the buyer introduces rapid changes to the business model, customers may go elsewhere. Changes that may upset customers include price increases, lowering the level of quality service, and replacing staff members important to customer satisfaction. The possibility that a buyer may disturb the customer base by instituting unwelcome or rapid changes is the reason why it is never possible for a seller to guarantee a buyer that the customer base will remain fully intact after the sale.

Demonstrate Competency to Customer Base

In addition to making gradual changes (if any) to the business model, a buyer is more certain to retain the customer base by demonstrating a high degree of competency and professionalism when servicing customers after the sale. While growing the business and increasing its sales and profits are important, focusing on simply satisfying the existing customer base in the months after closing is often the best course of action. Satisfying the customer base may come from accepting coupons or advertised deals of prior ownership, maintaining high staff morale by giving modest retention bonuses, and ensuring supplies and inventory are ample to meet customer demand. Most customers will appreciate the extra efforts made to improve their experience, and will have no reason to take their business elsewhere so long as the business performs at or above the level prior to the sale.

Communicate Smooth Transition to Customers

  • While the free training period after the closing helps transfer the sellers’ personal relationships with customers to the buyer, properly transferring the customer base to the buyer for many businesses requires a full transitional plan.
  • A full transitional plan should be drawn up by the business owner prior to the sale, and should describe the customer base, the best methods a buyer may employ to retain the customer base, and the best means in which customers are told about the change of ownership.
  • Communicating the transition to customers may entail personal introductions to customers during the free transition period, but often times doing so is impossible or unrealistic.
  • Sometimes the transitional plan may suggest sending out a joint letter or email to its customers which describes the buyer’s background and level of competency while also assuring the customer that the seller will remain a part of the transition team.
  • The effectiveness of any transitional plan depends on the customer base as well as the seller’s relationship with the customer base.
  • For example, a retail business such as a restaurant may have a transitional plan that emphasizes how pricing and service should be maintained after the closing by retaining key staff members, suppliers, and menu options.
  • Transitional plans for service-oriented businesses such as healthcare or HVAC repair companies may emphasize the need for the buyer and seller to jointly meet with key referral sources or large customers.
  • Lastly, some customers should be treated differently from others.
  • A strong transitional plan describes major customers and the best ways in which the buyer and seller should jointly communicate with them in order to assure the successful transfer of the customer base.

Retaining the customer base is a key element in many business sales, and is the most critical factor when the seller plays a significant role in the business including customer relationships. An experienced business broker should highlight to potential buyers how the customer base will be retained in order to justify the highest possible purchase price.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.