Step 6 – De-risking
We’ll thoroughly explore the essential yet frequently underestimated element of mitigating risk in your business. While it may not be the most thrilling subject, its significance in determining your business’s value cannot be overstated. Our goal is to provide insight into the often-neglected aspect of the valuation equation – profit and risk.
Risks and Business Valuation
As a savvy SME business owner, you’re undoubtedly aware that the risks your business faces -whether it’s the potential of business failure, fluctuating profits, unplanned events, or day-to-day operations – all contribute to a risk score, influencing the valuation. The higher the risk, the lower the valuation. This holds especially true for privately owned businesses.
So, how can you effectively de-risk your business and bolster its valuation? The first step is to comprehend the plethora of risks your business might encounter. These risks vary in severity, with some posing minor concerns while others could potentially lead to a catastrophic failure. To get started, compile a comprehensive list of these risks that could affect your business.
Assessing and Scoring Risks
Consider risks such as a delivery driver experiencing a flat tire during a crucial delivery or a driver delivering seafood to a restaurant without proper refrigeration, potentially causing food poisoning. Assess each risk based on two vital aspects: the likelihood of the risk occurring and the seriousness or implications if it does occur.
Combining the likelihood and seriousness of these risks provides a risk score. Lower likelihood and lower severity result in a lower risk score, while higher likelihood and severity lead to a higher score. Focus on addressing the risks with higher scores, working to minimize their occurrence and impact.
Developing simple checklists, templates, policies, and procedures tailored to each area of your business can be instrumental in minimizing risks. For instance, implementing a pre-trip checklist for drivers to ensure the vehicle’s safety and functionality can mitigate potential delivery mishaps.
Proactive Risk Management for Enhanced Valuation
Extend this approach to various aspects of your business, such as IT and cybersecurity, financial management, and payment processes. Align your efforts with the aim of minimizing risks throughout your operations.
Remember, a prospective buyer conducting due diligence on your business will thoroughly examine its operational performance and risk management. Taking proactive steps to identify, evaluate, and mitigate risks not only enhances the safety and stability of your business but also increases its valuation potential.
In conclusion, embarking on a risk review and strategically addressing these risks can significantly de-risk your business and maximize its valuation. Start by tackling the more substantial risks, implementing necessary measures, and watch as your business becomes more appealing to potential buyers. Minimizing risk is key to exiting your business like a boss and achieving optimal valuation.
This article was originally published on capitaliz.com.
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