Not every dollar of revenue is created equal. In fact, some of it actually costs you money.
When preparing to sell your business, one of the most powerful — and often overlooked — steps you can take is eliminating unprofitable clients. Buyers don’t just care about your top line; they care about the quality of your earnings. Trimming low-margin or high-maintenance accounts improves your profitability, strengthens your story, and signals operational discipline.
At Legacy Advisors, we tell founders that cleaning up their client portfolio before going to market is like decluttering your house before an open house. You don’t want buyers focused on what’s broken — you want them focused on what’s valuable.
Why Buyers Care About Client Profitability
Buyers evaluate businesses based on sustainable profit, not just revenue. When they see a customer list filled with low-margin, high-cost, or unpredictable clients, they see risk.
Unprofitable clients can:
- Inflate your revenue without contributing to bottom-line growth.
- Consume an outsized share of resources, reducing operational efficiency.
- Create volatility in service delivery and customer satisfaction metrics.
- Distort key performance indicators like customer lifetime value (LTV) and gross margin.
In The Entrepreneur’s Exit Playbook, I wrote: “Buyers reward focus and discipline. Every client should make your business stronger — not heavier.”
Pruning unprofitable relationships before you sell sends a clear signal: you understand your numbers and prioritize profitability over vanity metrics.
Common Signs of Unprofitable Clients
You don’t always need complex financial modeling to identify bad-fit clients. Some of the warning signs include:
- High servicing costs relative to revenue.
- Frequent scope creep or discount requests.
- Late or inconsistent payments.
- Low retention or satisfaction.
- Disproportionate demand on key team members.
- Poor cultural fit that drains morale or distracts focus.
If a customer relationship consistently costs more than it’s worth — in dollars, time, or opportunity — it’s dragging down both your operations and your valuation.
Lessons from Experience
When I sold Pepperjam, one of the smartest moves we made early was analyzing client profitability by segment. We discovered that a small percentage of clients consumed the majority of our team’s time but contributed little to profit. By strategically offboarding or restructuring those relationships, our margins improved — and so did buyer perception.
On the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/), Ed and I often discuss how this cleanup can transform an exit. One founder we advised removed just three unprofitable clients before sale — and their EBITDA margin jumped by nearly 8%. That improvement translated directly into a higher valuation multiple.
The takeaway: pruning isn’t losing revenue — it’s adding value.
How to Identify and Eliminate Unprofitable Clients
Here’s a process to clean up your client portfolio before going to market:
1. Analyze profitability by client.
Calculate revenue, cost-to-serve, and margin for each account. Don’t rely solely on instinct — use data.
2. Segment your client base.
Group clients into tiers (A, B, C) based on profitability, growth potential, and strategic alignment.
3. Evaluate retention and risk.
Determine which accounts are both profitable and stable. These will anchor your buyer’s confidence.
4. Strategically offboard or renegotiate.
For low-performing clients, either raise prices, reduce service scope, or exit the relationship gracefully.
5. Track the impact.
Measure how these adjustments affect gross margin, EBITDA, and team capacity. Buyers will notice the improvement.
The goal isn’t to slash revenue — it’s to refine your portfolio so every client strengthens your story.
The Valuation Advantage
Buyers pay more for profitability than for raw revenue. When you remove or restructure unprofitable clients, you’re not shrinking your business — you’re making it more efficient, focused, and valuable.
Strong margins also reduce perceived operational risk. Buyers know that a company with healthy profitability per client will transition smoothly post-acquisition and require fewer restructuring efforts.
A clean client base demonstrates leadership, discipline, and readiness — all of which justify stronger valuation multiples.
Final Thoughts
Pruning unprofitable clients isn’t just financial housekeeping — it’s a strategic advantage. It simplifies your operations, clarifies your value proposition, and tells buyers that you run your business with intention.
Exits don’t happen when you feel ready — they happen when your business is ready. And readiness means every client in your portfolio adds to your bottom line, not subtracts from it.
Find the Right Partner to Help Sell Your Business
At Legacy Advisors, we help founders prepare for exit by analyzing client profitability, eliminating risk-heavy accounts, and optimizing portfolios for maximum value.
Visit legacyadvisors.io to connect with our team, listen to the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/), and explore insights from The Entrepreneur’s Exit Playbook. Together, we’ll make sure your client base strengthens — not strains — your next deal.
Frequently Asked Questions About Client Profitability and M&A
Why does it matter if I have a few unprofitable clients before selling?
Because buyers focus on quality of earnings — not just total revenue. If a portion of your client base is eroding margins, increasing overhead, or creating volatility, buyers will see that as risk. They’ll either adjust the purchase price or delay closing to assess the issue. By eliminating unprofitable clients before you go to market, you improve EBITDA, stabilize cash flow, and signal operational discipline. As I emphasize in The Entrepreneur’s Exit Playbook, “Buyers pay for efficiency and focus, not chaos disguised as growth.”
How do I know which clients are unprofitable?
Start by analyzing your cost-to-serve for each client — including time, resources, and overhead. Compare that cost against the revenue and gross margin each account generates. If servicing a client consistently costs more than the value they bring, that account is unprofitable. You can also look for behavioral red flags like chronic late payments, excessive service demands, or frequent discount requests. These clients drain margin and morale — both of which reduce the attractiveness of your business to buyers.
Should I remove unprofitable clients even if it means reducing total revenue?
Yes — if it strengthens profitability. Buyers value efficiency, not inflated top-line numbers. Cutting 5% of revenue that produces negative margins is often worth more than keeping it, because it improves your EBITDA multiple. The key is to communicate this proactively: show how you identified and eliminated low-performing accounts to focus on higher-value clients. That story demonstrates leadership, control, and strategic maturity — qualities every buyer respects.
How far in advance should I address unprofitable clients before going to market?
Ideally, 12 to 18 months before starting the sale process. That gives you time to offboard clients thoughtfully, renegotiate terms, and demonstrate improved financial results over multiple quarters. Buyers prefer to see clean, proven trends — not last-minute adjustments. By showing that you’ve already optimized your client mix and maintained growth, you turn what might seem like a risk into a powerful proof point of operational discipline.
How can Legacy Advisors help me clean up my client portfolio before a sale?
At Legacy Advisors, we help founders assess client profitability, restructure pricing or contracts, and strategically eliminate accounts that hurt valuation. We provide the data analysis and exit strategy to ensure your client base looks strong, efficient, and scalable. Drawing from The Entrepreneur’s Exit Playbook and discussions on the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/), we show you how to turn your client portfolio into a value driver — not a liability. The goal is simple: to help you sell a business that’s lean, profitable, and ready for premium offers.