BE WARY OF CUSTOMER CONCENTRATION

SEARCHFUNDER INTERVIEW OF MOISES EILEMBERG - PART III 

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Part 1 on Understanding the Seller Dynamics can be found here.

Part 2 on Be Decisive can be found here.

Any other lessons learned that you would like to provide to a new operator? 

I have tons. In hindsight, it's hard to say because there are so many angles about a decision, but I would be very careful about acquiring a company with customer concentration, for the obvious reasons. 

How did it impact you in your business?

The third business we acquired was a business that had around 40% customer concentration. We did our diligence. We did customer interviews. We did checks. We convinced ourselves very strongly that the leadership of this customer was 100% bought into the relationship and that there was no reason for them to change. That was true. The problem was that a significant portion of the leadership of the customer was gone about 6 months after we closed the acquisition. That had its own set of consequences. Long story short, we ended up losing the customer. It was not through any fault of our own. Still, the reason didn't really matter. It was a massive problem for us. It set us back. Post-acquisition the customer was 25% of our revenue. It created a couple years of very significant stress on the organization. We had to go through layoffs. It was horrible. 

Was this during the Great Recession? 

It was afterwards. We actually fared pretty well during the recession. Our business stayed steady and even grew. We were feeling pretty good. 

I'm sure the layoffs were tough for you personally.

Yes. December 4, 2013 was by far the most difficult day of my career. 

Being engaged in conversations with your leadership team about layoffs right before the holidays must have been particularly tough.

It was horrible. It was very much a team - the whole senior team was involved, but still it was horrible. 

How did you handle the culture post-layoffs? It was probably fairly obvious to employees that one of the reasons for the layoffs was that the 3rd acquisition was not as lucrative as it could have been. So, you have 3 separate companies that are now merged. What was it like having to deal with the culture of the 3 together after the layoffs?

It actually even more complex than that. After the 3rd acquisition, we did a 4th acquisition, that was more of a technology company. It was pretty profitable from a gross margin perspective, but not yet terribly profitable over all. The 4th had already put some strain on our financials and our covenants. Then, we had this hit right after.

To answer your question, we communicated extensively. People knew (and had known for a fairly long period of time) about this very large customer and how important it was. We spoke about it in all of our quarterly communications and updates to the company. Everybody understood when we were going to lose that customer that it would have a big impact.     

We stood in front of the whole company and said: You are familiar with our biggest customer. Here is what is happening and here is why. This is what we expect the effect will be on our financials.   

We shared the numbers. We said: This is why we had to reduce costs by this much and this is why we had to do this today. We have a solid plan to get us back on track in 12 to 18 months. We wanted to do it quickly and decisively so we wouldn't have to do multiple layoffs. We just wanted to do it once.   

We presented a plan and a financial projection. Everybody knew the objective and the rationale. It wasn't that people were happy about it, but at least they had a sense we had been really thoughtful about the issue, had a plan in place and had laid out a path forward. There were lots of questions.   

We continued to communicate and did updates every 3 months.   

We were lucky enough in that the 25% customer did not disappear from one day to the next. Because of the nature of the business, the impact to revenue was over a long period of time. In the meantime, we had an opportunity to recover and even exceed where we were before. We communicated that all along. Slowly people regained confidence and trust.  

Let's talk about your exiting the business.

It was mostly the timing. We had gone through that experience coming out and had recovered. We had considered an exit at typical private equity cycle of 3 to 5 years. At the 5 year mark, we felt we had a lot of runway. At about the 6 or 7 year timeframe, we thought about considering existing and that was when the customer issue happened. It delayed the exit by about 2 years. When we exited, we had recovered all the value we had lost.  

Investors had been in for 10 years. It was just time. The company was going to benefit from new ownership. When you have investors for 10 years, they are not as excited about hearing how you're going to impact EBIDTA next year by 2 million dollars next to make an investment that will be of benefit 5 years down the road as most of them don't want to be around that long.   

Thanks so much for your time.

I appreciate what you guys are doing in building the community.

Summary of Insights

Here are a few of the key takeaways from our discussion with Moises:

• " You may need to separate what the Seller brings to the table in terms of knowledge of the business and industry from the future company culture that you want to create.
• " Small organizations can only take so much change. Focus on a few key levers at first.
• " Be decisive to avoid organizational paralysis and inefficiency. For decisions about organizational structure, it may be better for the organization for you to decide when you have 80 to 85% confidence in your decision than to reach a 90% confidence level.
• " Be wary of customer concentration. Even with a good decision, a hiccup may substantially set you back.
• " If you must make layoffs, be thoughtful but decisive. Communicate extensively to rebuild employee confidence and trust.

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