Many potential buyers buy businesses with a clear objective in mind: to make money. Some want to earn good coins as quickly as possible to use the money on different things. That’s why they prefer buying businesses with a loyal customer base. Although investors may shake things up eventually, they prefer to have an existing customer base in place when they open the doors to their new investment. This helps explain why customer retention is integral to selling your business.
Basically, what we are trying to convey, is that your customers are your most powerful asset. In a practical sense, they have the same attributes as other financial assets, like say, your company’s intellectual property or working capital. So you need to know how to manage and report on customers the same way you do with your physical and financial assets. After all, your customers are where the gold is. As you are planning to sell your business, your customers can be the ticket to getting the most out of something you’ve poured your blood and sweat into.
Customers are assets – but they are not all the same. In many cases, long-term customers are better assets than new ones for a range of reasons that we’ll discuss in this article. But in a nutshell, new customers cost more. Besides, their spending is dwarfed by their acquisition costs causing companies to not see dividends until long after the initial sale.
On the other hand, recurring customers are loyal and will give you consistent sales all through. They aren’t lured by price discounts or short-lived promotions, they ultimately see the value in the solutions your business offers. These customers cost less to service, pay more, create few bad debts and they will likely refer others to your business. That’s why businesses with recurring customers are so attractive to investors. Luckily, you can protect and nurture your clients with an effective customer retention strategy.
What is customer retention?
Customer retention refers to your ability to retain customers. It allows you to offer and extract more value throughout the customer lifetime. By now, you probably know that it is easier and cheaper to retain customers than to acquire them. But guess who else knows it – your prospective buyers.
Existing customers are a huge asset to any company. It’s even truer in this day and age when leads are hard to come by – leave alone loyal customers. If you have an established customer base, it is important to maintain a strong relationship with them so they stay loyal to your business.
Planning for future sales by building value
The eventual sale of your business is something every business owner should plan for. At some point, you’ll likely want to exit for one reason or another. When you do, the secret to getting full value out of your investment will be your loyal base of return customers.
A strong base of returning clients means recurring revenue, which is attractive to prospective buyers. Large buyers always want to know the earnings that come from recurring revenue. So, it is a big plus for your business to have a healthy flow of new clients. It’s even better when it has a growing net profit over a set period of time (like every year).
Customer retention and business valuation
Return clients guarantee the flow of future revenue. And as we’ve mentioned earlier, recurring revenue is attractive to prospects. Look at it this way.
A software provider that has 100 subscriptions every year may only get 90 subscriptions the following year. But they still managed to convince this number of customers to subscribe for the entire year and created a stable flow of recurring income in the process. Unlike one-off purchases, yearly subscriptions are predictable and dependable. Besides, it’s easy for the software provider to introduce secondary products that these customers will be happy to use alongside the software.
Strong recurring revenue can mean the difference between a fair price for your business and maximum value for everything. The numbers vary depending on business or industry. As an example, software companies average 3x revenue multiple. But those with a strong flow of recurring revenue can get up to 6x revenue multiple.
Why customer retention is essential to selling your business
Many business owners neglect existing customers in pursuit of new ones. This never ends well. While customer acquisition is vital for business growth, meeting the current clients’ needs can be just as critical. Businesses that implement strong customer retention strategies benefit more, especially during a sale. Here’s how.
The profits entice prospects
Studies show that a mere 5% increase in customer retention rates can boost profits from 25% to 95%. Besides, the existing customer is 50% more likely to try new products and spend 31% more than a new customer. For example, if you are into software, your customers may be open to buying into long-term maintenance or warranty plans. When you build a customer base with trust and loyalty toward your brand, you’ll enjoy profits. And in the eye of a prospective buyer, profit is a winner.
Prospects are enticed by savings on marketing
Retaining customers can also save you marketing costs. Going by this statistic, it can cost 5x more to attract a new customer than it does to retain an existing one. And as we mentioned, customers spend more with companies they’ve already done business with. A client’s first or second purchase is usually more of a ‘risk’, especially when buying from a small business with less brand recognition. So they tend to spend less in the beginning. But as the relationship grows, they gain more trust and increase spending.
What’s more, return customers are the best marketing agents. They will refer their friends and families to the business saving lots of marketing costs. One client can bring up to seven people to the business. So, it’s safe to say that customer retention is a smart marketing strategy.
Prospects love that customer retention can drive new acquisitions
Building a good customer relationship is part of a customer retention plan. When customers feel they are valued, they will become ambassadors of a business. They will also give valuable feedback to help your business stay ahead of the competition.
As you can see, customer retention is integral to selling your business. So, it should always be at the center stage of your business goals. If you have an upcoming sale, this is a perfect time to readjust your business plan to include customer retention strategies.