As you build your company’s future, it’s important to evaluate regularly to ensure that you aren’t building vulnerabilities into it that could come back to bite you down the road. Recently I was discussing this common entrepreneurial mistake with a colleague, and I was reminded of an article from my Inc. magazine column archives. In my column I described a conversation that I had with “Richard,” the CEO of an industrial engineering firm. Richard built his company primarily by catering to a very large multinational company. He was excited about taking on more work from this company, but I was quick to point out the costly mistake he was making.
Don’t Put Your Eggs In One Basket
At the time Richard’s company was already a decade old and had grown to $20 million, an impressive accomplishment. He came to me wanting ideas on how to continue that growth. His primary idea on how to do that involved reaching out to other divisions of his multinational client. These divisions largely operated autonomously, and there were a lot of them. Richard was clearly following the path of least resistance. His sales team was going for “the easy sell.” It was profitable enough to grow his company by millions, but what if something went wrong with his ONE client? As I said in my column:
“Whenever most of a company’s customers have a critical defining characteristic–such as being in the same industry or having the same owner–that company risks losing a huge amount of business all at once. That vulnerability might also affect its value when it’s time to sell.”
All it would take was for him to anger one division, or have the company need to scale down their expenditures for Richard to lose his sole source of revenue. Not a pretty picture, and I had first hand experience with how ugly that can look.
Go For the Tough Sell
I shared with Richard a similar experience that I went through with my archive retrieval business. Most of our customers were hospitals, medical centers and other health-related businesses. Referrals within that industry were high, and we were raking it in. So much so that we pretty much ignored other industries. Then, I learned that my company had a low valuation precisely because nearly all of our business came from a single industry. It turned out that our great success was also a giant vulnerability. I didn’t pay attention to it until it affected my company’s value. Luckily it wasn’t too late for me to do something about it. I advised Richard to address his problem in the same way:
“We didn’t stop selling to hospitals,” I told Richard, “but we put on new salespeople to go after other business, and that’s what you have to do.”
If you diversify your sales efforts, you can reduce your company’s risk of revenue loss and amplify sales in whole new directions. It may be more work, especially for your sales team, but as I told Richard, when “you’re just one or two angry or cash-strapped customers away from going out of business,” you have to step up your game.
You can read my article in its original form at Inc. Magazine’s website.