Dollars and Sense

How to consider risk factors as a business owner or manager

Have you ever watched “Shark Tank”? If so, you’ve seen how business owners often overvalue their businesses. The problem is one of perception. The person who endured sleepless nights and long hours in lean years perceives more value than a potential acquirer. Nostalgia factors in.

The standard equation for valuation is 2.5 times EBIDTA (earnings before interest, debts, tax and amortization), but this equation is less a benchmark than a starting line. There are other risk factors that could change this equation, too.

Let’s start here: Do you still have your first customer? How much is that client paying compared to newer ones? (And how much of your angst is related to him or her?) What about your accounting practices? Does one person hold the reigns to your financial future – thereby raising the risk of theft and embezzlement? Or do you have a system of checks and balances in place? These are a few of the questions Peter Sieffert, a consultant with Swiss Equity Partners in California, raised during a recent presentation for business leaders I attended.

Sieffert outlined some of the major risks business leaders take, with most borne out of convenience. For example, consider these potential risks: a single source for new-customer referrals; the CEO or president as the relationship-holder for top clients; lack of vendor diversity (or not check-ing prices regularly); employees without non-compete agreements; no formal customer contracts (or attorney to review them periodically).

(Note that non-compete agreements, per Sieffert, can’t be signed retro-actively, but could be required as part of a major promotion.)

These risk factors indicate overall company health. Even if you’re never planning to sell, you’ll let go of the reins one day, one way or another.

Some factors are less quantifiable. How strong is your management team? “Are they responsible for strategic directives and initiatives and the day-to-day?” Sieffert asked.

If yes, the owner can spend time developing relationships rather than everyday operations. How supported are your mid-level managers? Do they have the tools, systems and processes needed to perform? This can be as simple as software, and as complex as being able to replace an underperforming staffer. Could someone replace you in the event of an emergency?

It’s a lot to consider, but it makes sense to do so before an emergency (or a buyout offer) strikes. Even if you’re a one-person show, you should have a succession plan in place.

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