If you’re planning on buying a company, particularly a service-based business, one of the key factors to consider is its current client list. A company’s client list provides useful information on the value of the business, giving you an idea of how much you can expect to make per month starting out and helping you determine how much to pay for the business. Making an accurate assessment of the client list before going through with the purchase sets you up for success and reduces your risk.

Determine Profits From Each Client

Each client brings a certain amount of value to a business, either monthly or yearly. Whenever possible, calculate profits for each individual client. For businesses with large client lists, separate clients into categories based on the amount they spend, as you need to know if the business’ profits are balanced among all its clients or come primarily from a small group of big spenders. If it’s the latter, buying the business is more of a risk, and client retention is critical to your success.

Figure Out the Likelihood of Retaining Clients

You may not keep all the clients on a business’ client list during the change in ownership, depending on the type of business you buy and why clients chose that specific business. For example, if you purchase a gym, you can usually expect to retain most of its clients. Some clients may have already committed to contracts for a certain length of time, and even those on month-to-month contracts likely aren’t going to go find new gyms just because of a change in ownership. But if you purchase a gym and get rid of trainers who offered classes or private sessions, you’re more likely to lose the clients who went there to work with specific trainers.

Evaluate Client Costs

Acquisition costs vary from client to client, but you can determine an average amount based on projected marketing costs and the number of new clients you expect to acquire through those marketing efforts. Compare this amount to the cost of maintaining good relationships with the clients already on the list. Using the previous gym example, if it’s going to cost you more to retain the gym’s clients by keeping its trainers around than you’d spend on the marketing to acquire new clients, then the gym’s client list doesn’t offer much value.

Estimate Monthly Income

After you have an idea of how many clients you’re going to keep and expected profits from those clients, you can compare that amount with the costs of running the business each month. With an estimate of how much you’re going to make every month from the business, you can decide if the business is a sound investment at the current asking price. Along with a business’ financial statements, its client list is an important piece of information to use in your evaluation. Not only can it help you make an informed decision, you can also use what you learn as you negotiate on a price with the owner.