How Does The Fact That the Company Has One Customer Affect the Value of the Business?

We are often asked - how does the fact that one company has one customer affect the value of the business? Therefore - we found it appropriate to answer the question once and for all.

The answer to the question, of course, depends on the circumstances - or rather - on one question - related to the valuation of companies - what method is used to assess the value of the business or the valuation of the company?

Methods for valuing companies

There are various methods for valuing companies - including the Berkus method, the cash flow discounting method, the asset value method, the profit multiplier method, the capital multiplier method, the sales multiplier method, and more.

Each method is used in different circumstances. Startup at the concept stage - the best way to assess the value of a business is the Barcus method. A stable company - that is, a company whose profits are steady - changes slightly every year - the most appropriate method is the profit multiplier method and more.

Among all the methods - only in one case the number of customers may be significant. This case is where the valuation is performed using the discounted cash flow method - DCF - Discounted Cash flow.

In the method of Discounted Cash Flows, the value of the business is calculated by estimating the future cash flows that the company will generate and dividing them by the discount rate corresponding to the risk (Discount Rate).

How does the fact that one company has one customer affect the value of the business according to the method of discounting cash flows?

The first parameter important in the method of discounting cash flows is cash flow. Take, for example, a company whose cash flow is NIS 1,000,000 annually. While implementing the discounted cash flows method to evaluate a company, we find that it does not matter whether one customer has generated 1,000,000 USD, or the cash flow of 1 million USD was generated by 100 customers who each made 1,000 USD. The important thing is that the company recorded a revenue of NIS 1,000,000 annually.

The second important parameter in the Discounted Cash Flow Method is the cost of capital - or the capitalization rate. The number of customers of a company may affect the discount rate. When a company has a single customer - there is a risk that when the customer leaves the company - its revenues will be harmed. Hence a company with a single customer deserves to express this risk at the capitalization rate appropriate to the risk.

Conclusion

In conclusion, in this article, we discussed how the fact that one company has one customer affects the value of the business. We hope the explanation was helpful. We would love to hear your notes regarding our blog post. Suppose you are looking for a business valuation report. In that case, you can start creating it for free using our intuitive ai based business valuation software.