The Business Owners’ Special Series (B.O.S.S.) No. 42
Essential steps to eliminate business risk, improve value and increase profits
Business owners are often unprepared for a business exit and experience a great deal of anxiety when it comes time to sell. Potential buyers will bring in a team of experts to assess risk, commonly contributing to that anxiety. The more risk that buyers discover, the less they are willing to pay for the business.
Here are a few steps you can take today to reduce risk and bring even greater value to your business. Taking these actions will help make you better prepared and more confident when you ultimately sell your business. Other benefits may include the realization of greater operational efficiencies, profitability and employee satisfaction.
1. Become a risk hunter:
There are risks inherent in each area of your business operations. Look at each functional area of your business, from warehouse operation to the accounting function, and question, “Where can things possibly go wrong?” Whether it’s preventing warehouse accidents, eliminating operational inefficiencies or preventing theft, eliminating risk can increase current profitability. It also makes your business more valuable from a buyer’s perspective.
2. Ask your frontline employees:
You will be surprised how many employees have terrific ideas for improving efficiency, eliminating waste, improving service, cutting costs and reducing risk. They can often tell you what would make their job easier or safer.
3. Bring in the experts:
When you sell your business, a prospective buyer will bring in a team of experts to assess your business and identify areas of risk. As stated earlier, the more risks buyers discover, the less they are willing to pay. Eliminate risks to increase business value. Don’t wait for a buyer’s experts to identify the value-killing risks that are in your business. Bring in your own experts and eliminate those risks now, so that you can sell your business at a greater price. The following are a few examples of specific risks to consider.
Human resources (HR) risk: An HR professional can determine if you are complying with the complex array of federal and state laws, including employee benefits, retirement plans, employment taxes, health ordinances and labor laws, among others. The Department of Labor, the IRS and a host of other state agencies provide an endless maze of laws and mandates. You may be surprised to discover areas where you have not complied. An HR professional can identify issues and keep your business fully HR compliant.
Technology risk: This risk appears in two areas, and IT professionals can assess the level of risk in each area to recommend appropriate solutions.
- Technology obsolescence: Will a buyer have to make a significant investment to bring the technology in your business up to current standards? Furthermore, from an operational perspective, will operational efficiency improve profitability for you with such technology upgrades?
- Privacy and data protection: Do your information systems offer substantial protection of your business information, and protect the data of your employees and customers? Not only do you need to comply with privacy laws, but you also need to protect yourself from litigation and loss of reputation if sensitive data is compromised or stolen due to a data breach.
Tax risk: Many states in the U.S. are modifying their income tax and sales tax laws to require you to pay taxes, even though you may have no physical presence there. Furthermore, the increasing number of remote workers may mean your business must pay payroll taxes and income taxes in states where you previously had no physical connections. A buyer will conduct a thorough multistate tax review to determine if there are risks associated with failure to pay sales tax, income tax and payroll tax in these jurisdictions. A CPA can do that assessment now to help you eliminate that risk. If there are back taxes owed, the CPA can assist with voluntary compliance programs to limit the cost and exposure to back taxes and penalties.
Accounting risk: Conducting background checks before hiring employees is wise, but alone won’t adequately protect your business and prevent theft. Employees who handle cash, checks, credit cards, bank accounts and accounting records have plenty of opportunity for embezzlement, which may be hard for you to discover. Your CPA can assist with establishing internal controls to minimize risk and protect your business.
Environmental risk: Each industry is subject to unique federal and state environmental laws and regulations. If your business is subject to them, then an environmental risk consultant should be considered. Failure to comply with such mandates can attract substantial penalties. Any exposure to penalties should be resolved and corrective action taken long before selling your business.
These are just a few examples of opportunities to identify risk and eliminate it in your business. Each business has its own unique risk areas. You may be able to identify and resolve some risks on your own, whereas others may require a specialized expert. Some risks can be covered by additional insurance, but many that are not will require corrective action.
The takeaway is that failure to identify and address risks in your business now can have many adverse consequences. While buyers are not afraid of risk, they reduce the price they offer to buy your business based on the risks they discover. Eliminating risks now will result in a higher sales price. Furthermore, risk elimination may also result in greater asset protection, employee safety, operating efficiency, cost savings and increased profits. The time to take action is now.