I chatted with a founder who’s thinking about shifting his business back to growth mode. He’s spent the last year or so fine-tuning processes and people to make the company more efficient. His profit margins have increased by 50%, and he’s ready to start growing again.

He shared that he’s thinking about taking on, as a customer, a larger company that needs the services his company provides. It would give him a steady (but not guaranteed) number of new monthly orders, but at a price reduction and with longer payment terms. He’s considering this because it could get the company back to growth mode quickly.

A few things I pointed out to him:

• Margin compression – This agreement will bring in low-margin revenue, which is different than his current revenue. He’ll have to do more top-line revenue to generate the same gross-margin dollars.
• Concentration – He’ll be heavily reliant on this single entity for a material amount of his revenue. This means he won’t have leverage in that relationship, which could work against him if the relationships frays.
• Operational strain – This is a traditional business that requires people to do the work. The additional orders will necessitate adding more staff. But the lower margins on that revenue could put the founder in a tough spot. He might not be able to afford the caliber of staff he’s used to, which could have an impact on quality and team culture.
• Cash flow – The larger company wants preferential payment terms, meaning it wants longer than average to pay. This could dramatically affect cash flow. The founder must pay employees and cover the costs of materials upfront but wait longer than normal to be paid. Running low on cash will be a greater risk. He can probably cover shortfalls with something like a line of credit, but that would incur interest expense, further reducing his margins.

This founder has put in a lot of work to get his business to a great place with high margins, a great team, and a solid culture. I’m not sure what he’ll decide, but these factors are worth including in his decision-making process. Landing a big customer—a big source of revenue—sounds appealing, but second-order effects should be identified and considered.