Exit Planning in Merriam

As part of our comprehensive exit planning services across the Kansas City metro, we work with Merriam business owners facing a double-edged situation. You built recurring revenue, which buyers love. Monthly contracts, subscription models, retainer agreements. Predictable cash flow, high retention, strong margins.

Then buyers look at customer distribution and see 68% of that beautiful recurring revenue comes from four customers. Deal killer.

I've lived in this metro for 30 years. Merriam's I-35 corridor and business districts house service businesses, B2B operations, and specialized providers who successfully transitioned to recurring models. You did the hard work of converting project-based relationships to subscription relationships. You built what buyers want to buy.

But you built it on concentrated customer base, which is what buyers run from.

A Merriam managed services business generates $1.6 million in annual recurring revenue. Excellent retention (94%), strong margins (42%), clean operations. The recurring revenue should command 4.5 to 5.5 times multiples. On $672,000 EBITDA, that's $3 million to $3.7 million in enterprise value.

Then buyers see the customer concentration: top three customers represent 71% of revenue. Immediate discount to 2.8 to 3.2 times multiples. Same business, same recurring revenue quality, concentration risk cuts value to $1.88 million to $2.15 million.

The concentration discount destroyed $1.12 million to $1.55 million in value. You built the valuable revenue model, subscription-based, but you built it around too few customers.

This is the Merriam paradox: you did the right thing (recurring revenue) and the wrong thing (concentration) simultaneously. Now you need to fix concentration without destroying the recurring model. That's harder than it sounds.

The recurring revenue concentration trap develops from success, not failure. You converted a major customer from project-based to subscription relationship. That worked well. You converted two more. Your recurring revenue grew from zero to $1.1 million. You had momentum.

But that $1.1 million came from three customers. You have 15 to 20 smaller recurring customers adding another $500,000, but the base is concentrated. You know you should diversify, but the major customers are happy, retention is perfect, and adding smaller customers is harder work than maintaining large ones.

Years pass. Your recurring revenue grows to $1.6 million. The top three customers now represent $1.14 million of that. You added smaller customers, but you also grew the large ones. The concentration didn't improve, it stayed constant or worsened.

Now you try to exit. Buyers love recurring revenue. They see your $1.6 million annual recurring at 94% retention and get excited. Then they see concentration and discount everything.

Here's their logic: post-acquisition, if one of your top three customers leaves, 24% to 30% of revenue disappears. The business becomes unprofitable or barely breaks even. That's existential risk. No buyer pays premium multiples for existential risk.

You protest that the customers are locked in on three-year contracts with renewal history and no indication of leaving. Buyers respond: relationships change post-acquisition. We can't know that customer loyalty to you will transfer to us. We have to model the risk.

This is the prison. You built valuable recurring revenue on fragile customer foundation. The revenue structure is right. The customer structure is wrong. Fixing it requires years of systematic customer diversification while maintaining the existing large customers.

Most Merriam business owners resist because diversification is hard work. Adding 20 to 30 smaller recurring customers to reduce top three from 71% to 45% takes 24 to 36 months of focused sales effort. But without that diversification, you'll never capture the full value of your recurring revenue model.