Business Owners’ Special Series #16
We are so wrapped up in the current pandemic that we may forget there is a pattern and a cycle to economic shifts. You may not remember the Savings & Loan Crisis of 1990-1991 or the Dot-Com Bubble Burst in 2001. However, you most likely remember the Great Recession in 2009 – which actually began in 2007 with the Subprime Mortgage Crisis, and you will never forget the COVID-19 crisis of 2020.
The lesson from our economic history is that economic downturns are as cyclical as seasons. They are recurring events, even though the timing and the cause of each downturn is unpredictable. Economic shifts are significant business risks that happen outside of your business and outside of your control. But if they are nearly impossible to foresee, how do business owners position themselves to survive each economic downturn and recover quickly?
Identifying and Mitigating Business Risks
You can reduce the impact of the outside risk by taking control of and mitigating the inside risk. Think of reducing inside risk as strengthening your business’ immune system, so when an economic downturn hits, your business is less vulnerable and more immune to disruption than competitors who have not de-risked their business.
While specific types of inside risk are unique to each business and need an adept eye to detect, common examples include too much owner dependence, excessive customer concentration, lack of diversification in product and service offerings, over-reliance on few suppliers, over-dependence on people instead of processes, excessive debt, etc. These inside risks will weaken your business’s immune system, as well as deflate your business’s value.
When you take steps to identify and eliminate inside risk, you are in a better position to survive the outside risk of an economic downturn and other external business challenges, such down cycles in your industry, disruption from technology, predatory practices of competitors, etc.
Strong Businesses Attract Serious Buyers
Not all risks are obvious to you. If they were, you likely would have taken steps to mitigate them. That is why it is vital for the overall health of your business to have highly trained eyes find any weaknesses you may not have identified. Think of this as your annual checkup.
Not only do regular risk checkups help you reduce risk inside your business and keep your organization stronger during an economic downturn, they also make your business more valuable when the economy recovers, and at all times. Even if you have no plans to sell your business, it is important to have your business ready for sale at all times, because you cannot predict what life has in store. If the COVID-19 pandemic has taught us anything, it is to be prepared for the unknown and the unexpected, and make certain your business’s immune system is as strong as possible, at all times.
Successful buyers in the market place ultimately drive business valuation, and buyers are very risk sensitive. They are not afraid of risk, but the risk they identify will change the value they place on a business. The more risk they find, the less they will pay. Earnings are not everything: risk and value clearly of have an inverse relationship.
Consider two businesses with the exact same financial data. They are direct competitors in the same industry, with the same revenue and the same earnings.
Business #1 has regular risk checkups and is stronger than ever. But Business #2 has not, and 90% of its customer base is in the restaurant industry. If Business #2 had regular checkups with an exit planner, the business owner would see that they have a high level of risk due excess customer concentration in a single industry.
Then COVID-19 hits and restaurants close. Business #1 is far less vulnerable because of diversity in its client base and industries served. While its restaurant clients are closed, it continues to serve its other customers, including grocery stores, hospitals, assisted living facilities and other industries. Business #2, however, is less likely to survive due to over concentration in serving a single industry.
Experienced buyers have a keen eye, and they can find the unmitigated risks inside your business. Therefore, by reducing any inside risks early, Business #1 is more valuable and would sell for a higher price than Business #2 – before, during and after COVID-19.
By keeping your business healthy, and eliminating the inside risks, you are not only better off as an owner, but also as a seller because your business is going to have more market value and command a higher price.
Risky Business – Do Not Worry, You Have Help
As a business owner you take risks every day, and so it is easy to fear risk less over time. That can make you blind to many risks inside your own business.
You have a lot on your mind, especially right now, so if a particular risk does not keep you awake at night, it will likely remain unmitigated and continue to devalue the business over time. So you will have to make it a regular habit to step back and look at your business through the eyes of a buyer.
But conducting your own annual checkup is time consuming, and it could be difficult to see those risks that you have become accustomed to living with and thus desensitized to. That is why when it comes to our physical health, we consult doctors and specialists to stay healthy.
In the business world, Certified Exit Planners are your business’s health consultants. We are trained to find the places where your business is vulnerable, root out the risk and improve your business’s overall health, all while developing value-building strategies.
We can also see your business through buyer’s eyes and make the necessary adjustments, so your business will have a higher value when it hits the market. And that time may not be today, tomorrow or anytime soon, but is our mission to ensure you are focusing on reducing risk, building value and being as healthy as possible at all times – even during a pandemic.
Rich Gunn leads BPM’s Value Acceleration Service Team, which helps with succession, transition and exit planning for business owners. Rich is a Certified Exit Planning Advisor and a member of the Exit Planning Institute.
The Business Owners’ Special Series (B.O.S.S.):
The Business Owners’ Special Series (B.O.S.S.) is a library of information for business owners who are proactively seeking guidance from experts on how to implement value acceleration in their business. Be sure to keep reading, if you desire to develop your business to its maximum potential value and gain an understanding of how and why beginning the process sooner results in building greater value.