Do you really know the margin on each customer and product? The numbers a buyer will want to see

An SME may have well-organised financial statements, healthy profitability and consistent growth, but this does not necessarily mean it is ready to answer the questions that will arise during a sale process.

For a potential buyer, revenue and EBITDA are only the first level of analysis. The next step is to understand how those results are generated: which customers contribute most to profitability, which products support margins, which sales channels perform best and how much the overall result depends on specific markets or geographic areas.

Business owners often have a very good operational understanding of these dynamics. What is not always available, however, is structured data that can support that understanding and be readily verified.

That difference becomes important once the company enters a sale process.

Financial statements show the result. A buyer wants to understand where it comes from

Two companies can have the same revenue and a similar EBITDA while presenting very different economic profiles.

One may generate revenue and margin across a broad customer base and several product lines. Another may depend heavily on a small number of customers or on a single particularly profitable activity.

The overall financial result may look similar, but its composition changes how a buyer views the business.

This is why the analysis gradually moves from aggregate figures to the underlying components. The objective is to understand whether the results achieved in recent years are sustainable and which factors could affect them in the future.

The question is no longer simply how much profit the company generates, but where that profit comes from.

Revenue and margin tell two different stories

One of the first areas usually examined is the customer base.

Knowing that the top ten customers account for a certain percentage of revenue helps measure commercial concentration. However, a customer’s share of revenue does not necessarily reflect its contribution to profitability.

A major customer may benefit from particularly favourable commercial terms, require dedicated production, create higher logistics costs or absorb a significant amount of technical and sales resources.

A smaller customer may instead provide more stable conditions and generate a higher margin.

The same applies to products. A high-volume product line may generate relatively modest margins, while a product family that appears less significant in revenue terms may make a substantial contribution to EBITDA.

When these differences are not visible in the company’s usual reporting systems, they need to be reconstructed.

And it is often during this process that issues emerge which were not apparent from the overall profit and loss figures.

What information might a potential buyer request?

There is no single level of detail that applies to every company. The information that matters depends on the sector, business model and the way the company generates revenue.

For a manufacturing business, margin by product family may be particularly relevant. For a project-based company, profitability by project or project type may provide a more meaningful view. In other cases, sales channels, geographic markets or the composition of the customer base may be more important.

During a sale process, the buyer may therefore want to analyse:

• the performance of key customers over recent years
• concentration of revenue and margin
• profitability by product or product family
• results by division or business line
• performance across different sales channels
• the geographic distribution of revenue and margin

The objective is not to produce every possible analysis. It is to identify the information that best explains how the company actually makes money.

When the data exists but is not yet ready to use

In many SMEs, the necessary information is already available, but spread across different systems and tools.

Accounting systems contain the financial data, ERP platforms hold information on orders and production, CRM systems capture commercial activity and various spreadsheets complete the picture. A significant part of the company’s knowledge may also sit with the people who manage customers, purchasing or production on a day-to-day basis.

This may work perfectly well in the normal running of the business.

The challenge arises when an external party asks the company to reconstruct information quickly using consistent and verifiable criteria.

An analysis of margin by customer, for example, may require data to be extracted from several sources, certain costs to be allocated and a common methodology to be established. Product profitability may require a distinction between directly attributable costs and shared costs. A historical analysis may require checking whether the same methodology has been applied consistently over time.

A response prepared quickly can therefore lead to further questions. If an initial analysis later changes because additional information has emerged, the buyer will want to understand why.

These checks are normal during due diligence. The difference lies in whether the company enters the process with the information already organised or has to build it while the buyer’s analysis is already under way.

Preparing these numbers does not mean making management reporting more complicated

The solution is not necessarily to introduce sophisticated reporting systems before a sale.

In many cases, it is enough to identify the dimensions that genuinely matter to the business and make sure the underlying data can be reconstructed reliably.

If profitability is presented by customer, it should be clear which costs have been allocated and on what basis. If it is analysed by product line, directly attributable costs should be distinguished from shared costs. If several years are being compared, the methodology should remain sufficiently consistent over time.

The objective is not to achieve theoretical precision at all costs, but to produce information that is understandable, consistent and defensible.

A straightforward analysis built on clear criteria is often more useful than a highly detailed model that requires constant explanation.

The information a buyer wants is useful to the business owner first

Preparing these analyses before a sale gives the business owner an opportunity to look at the company from a different perspective.

It may emerge that a significant share of margin depends on a small number of customers, even where revenue appears well diversified. A business line regarded as strategic may turn out to be less profitable than expected, while less visible activities may contribute more substantially to earnings.

Differences between markets, channels or customer groups may also become visible where aggregate figures previously concealed them.

These are not necessarily weaknesses. Every company has concentrations, distinctive features and dependencies that reflect its business model.

Understanding them in advance, however, makes it possible to assess them, explain why they exist and prepare a coherent account of their impact.

When the same information is reconstructed only after a buyer requests it, the pace and priorities of the analysis are instead being set by the transaction itself.

Entering negotiations already knowing the questions

During the sale of an SME, a buyer will progressively turn the headline financial results into a more detailed picture of the business.

Financial statements and EBITDA explain what the company has produced. Customers, products, channels and markets help explain how those results were produced and how sustainable they may be.

Preparation therefore goes beyond having the documents required for due diligence.

It also means checking in advance whether the company can support with data what the business owner already knows from experience.

The clearer this information is before the company goes to market, the less likely it is that important analyses will have to be built under the pressure of an ongoing transaction.

FAQ

Will a buyer always ask for margin by individual customer?

Not necessarily. It depends on the business model and the importance of individual customers. However, it is common for buyers to examine at least the most significant customer relationships and their contribution to the company’s results.

How many years of data should be prepared?

This depends on the characteristics of the company, but looking at several years helps distinguish structural trends from one-off events and provides a clearer view of how customers, products and markets have developed over time.

Does the company need an advanced management accounting system?

No. What matters most is that the relevant data can be reconstructed using clear and consistent criteria. The complexity of the analysis should be proportionate to the business.

Does customer concentration always reduce company value?

Not automatically. The stability of the relationships, their duration, market characteristics and the economic contribution of individual customers all need to be considered. Concentration is something to understand and explain, not a conclusion in itself.

Can these analyses affect company valuation?

Yes. They help a buyer assess the quality and sustainability of earnings. Two companies with similar EBITDA may be viewed differently if their customer concentration, distribution of margin and stability of earnings are materially different.