Risk Impacts Valuation

Identifying and understanding your risks can help you build a better future for your business.

15 October 2018

We understand that risks in the business impact on business valuation, but as we have a closer look at what these risks are, you’ll see that they also hold a business back from achieving its full potential.

The risks in the business are typically those things that get in the way of executing a strategic succession plan. Here are a few examples:

Key Person Reliance
The ongoing operation of the business relies heavily on an individual; even worse is the situation where key people are the business owners who are looking to exit the business.

Management Mismatch
The skills and experience of the management team isn’t suited to the business direction (for growth), and there is nothing in place to assist management succession; this is especially the case where the business owner/s who are wishing to leave the business are also the only people on the company board and in key management roles.

When business systems are not documented, are ineffective or unproven, the business is usually inefficient, experiences losses and has strained client relations due to poor quality work. Typically, the management team and owners of un-systemised businesses complain about having to micro-manage and find it time consuming and expensive to train replacement staff.

Lack of Documentation
We realise that putting a plan in place doesn’t guarantee success in its own right, but it does help team alignment to common goals, and when external or internal changes trigger a change in business direction, the plan needs to be the blue print that is referred to and checked before deciding to switch horses. Other important documentation – for compliance and strategic reasons – includes key relationships (clients, suppliers and employees) and due-diligence documentation.

Generating Revenue is Costly or Time Consuming
A lack of repeat or referred business is a classic indicator of the revenue generation model being ill considered or ineffective; if there is a scatter gun approach to getting sales instead of a strategic approach, it will be costing the business dearly to get new business through the door. A heavy reliance on key customer/s is also a risk when it comes to reliability of future revenue.

Lack of Reporting
If a business can’t show a track record of reporting and forecasting across all areas of the business, then how on earth can it operate autonomously? Who is making decisions and on what basis? We know that ‘gut feel’ is a culmination of experience, and it often does result in good decision making, but this is a very risky basis for continuing to make decisions in a business if it is to be robust against industry, market or internal ‘surprises’, or if it is to achieve growth or ownership succession.

Poor Technology
Outdated or underutilised plant and equipment poses risks to business sustainability. It creates competitive vulnerability, and breeds complacency. Even if the business is doing well financially without striving for optimal efficiency and utilisation, it sure helps buffer against external changes (such as the GFC) if efficiency is a habit and valued in the business. Also relating to technology, ineffective intellectual property management presents risks and can undermine the value of a business, particularly where the intellectual property is one of the assets that give the business a competitive edge.

Sick Finances
Personal finances mixed with business may bring short term gains in personal wealth, but these can come at a much higher long-term cost. Remember that if you’re looking to sell the business or have it valued for any reason, each dollar that’s missing from the bottom line can be worth many times more dollars when it comes time to value the business. In terms of reliability of future revenue, basic business sustainability and capacity to finance growth, other risks are inconsistent cash flow, poor or inconsistent profit margins, and carrying unprofitable products/services.

When we have reduced the risks, the foundations of the business are right and ready for growth and succession.