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Step 6 – De-risking

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Step 6 – De-risking

By , October 19, 2023
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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.

Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant with over 20 years of experience advising business owners. His background as a CPA in public practice has provided invaluable experience in the key issues of concern to business owners.

In March 2014, Craig was appointed Executive Chairman of the SME Association of Australia, Australia’s largest small business organisation representing over 300,000 business owners.

In October 2014, he was awarded the Exit Planner of the Year at the Exit Planning Institute Annual Conference in Texas, USA, due to his innovative development of an exit planning process to help business owners maximise business value and achieve a successful exit.

Craig’s proprietary structure - a Peak Performance Trust - has won the Australia-wide award for the Employee Share Ownership Plan of the year twice in four years.

In November 2018, Craig launched SME Experts in partnership with Mark Bouris’ Mentored on Podcast One and quickly grew the monthly podcast audience to over 26,500 downloads; in October 2019, he released a new podcast focused on medium-sized businesses - Mid-Market Matters.

In July 2021, Craig joined the NSW Committee for STEP (Society of Trust & Estate Practitioners) – focusing on advising families across generations.

Craig has also launched a SaaS platform, Capitaliz (which captures the 21-step process), to assist other advisers internationally deliver advisory services at scale.

In November 2021, Craig was appointed Executive Chairman of NSW Leaders, a business mentoring group for leading NSW businesses.

In July 2022, Craig West received the award of Doctor of Business Administration for his research thesis titled “Examination of the key factors driving business exit options in Australian Small and Medium Enterprises.”

Craig is passionate about encouraging business owners to think strategically, maximise the value of their business and achieve a successful exit.

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