Don’t cull your client list before selling your business

Fuller Landau team • February 10, 2016

Although some say it is a good idea to clean up your client list prior to listing your business for sale, a wholesale cleanup is likely to raise red flags for potential purchasers, says Toronto forensic accountant and chartered business valuator Patricia Harris.

“You shouldn’t just say, ‘OK, I’ve decided to sell my business so I’m going to look at the client list and then cut some,’ because if you’re forecasting revenue and you’ve got a forecast decrease you’d better have a good explanation as to why you’ve lost or cut particular clients,” Harris, partner at Fuller Landau LLP, tells Succession Planning, a special supplement published by The Bottom Line and Lawyers Weekly.

Harris notes that if a client is not paying, the owner of a business should be addressing that well in advance of a sale, and weeding them out along the way.

“In terms of doing a cull right before you sell, it doesn’t seem like it’s really normal practice or something that’s really advisable,” she explains.

“In my mind, as long as you’ve been doing this and looking at your clients on a regular basis, there should be no reason just prior to a sale to go through over and above what you’ve already been doing.”

One danger of culling the list is that, even if the client isn’t paying on time, they’re still producing revenue for the business, Harris says in the article.

“If somebody’s looking at buying your business they want to see how big it is and one of the best ways to see how big it is, is the revenue. They’ll look at profitability for sure but by culling a client you’re going to have to have some good explanations as to why you did so and why the company who’s buying or the person that’s buying it won’t be able to expect that revenue.”

Also, a special purchaser might be buying the business for the clients rather than the business itself. A buyer may believe they will be able to establish a better relationship with the clients and make more profit. Therefore, under that scenario, says Harris, cutting the client list would detract from the purchase price.


This post was originally published in Advocate Daily, February 2016. Click to read.


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