Do you pass the 15% test?

I used to own a small marketing communications agency. Ten years ago, we were generating $150,000 in operating profit on approximately $750,000 in revenue when I decided to look for a partner to help us expand. I had heard marketing agencies trade for one times revenue, and almost half of our business came from a blue-chip Canadian bank, so I thought my business was worth at least $750,000.

I can remember the rude awakening I got when one experienced operator I was pitching on investing was quick to dismiss my little company as worthless. He had discounted my valuation to zero because of our reliance on a single customer for almost half of our revenue. He argued that if we lost our biggest client, we were finished as a business.

I knew an overreliance on one customer wasn’t ideal, but I had no idea it would make us worthless in some eyes.

Apply the 15 percent test on your own business. Look back over the past 12 months and see what percentage of your overall revenue is attributable to your largest client. If one whale of a customer is driving more than 15 percent of your revenue, expect your valuation to be discounted. If one client makes up 40 percent of your revenue or more, your business may not be sellable until you diversify your customer base.