By Michael Torney, J.D., CFP®, LL.M., CEPA
After a business owner has completed an enterprise value assessment, it’s time for action. One of the first steps to increasing value is to protect what you have already built by mitigating risks in the business. The most common risks are known as the five Ds: death, disability, divorce, distress, and disagreement. You may not be affected by one of these. But any potential buyer will likely focus on these areas to see if they are buying an asset with risk. More likely, you will encounter one of these threats yourself while owning the business.
There are a few tools that can help in this area. The first is a business continuity plan. What happens if something happens to one of the owners? What about if your largest client leaves? What happens if one of the owners gets divorced? What is the plan if the company faces a significant lawsuit? Do you know how you will deal with a top sales rep leaving? Are you prepared for the disability or death of someone significant in the business?
Once you have some risks and solutions identified, you can prioritize which risks are in your control and which are not. Focus on the risks in your control. Then, focus on the risks with the highest likelihood of materializing and that have a large impact on the business.
There are also personal risks identified in the enterprise value assessment that will be completed. Shoring up an owner’s estate plan (or creating one!), analyzing the life and disability insurance program, property and casualty insurance analysis, and asset protection strategies all should be discussed as part of the protect phase.
One of the items that will come up in this phase is ensuring that a business can run without its owner. Achieving this milestone both protects short-term value and enhances long-term value. This involves putting together written procedures, detailed financial statements, and a customer base the is not dependent on the owner’s presence. This part takes work but the reward is often very high for an owner: increased business value & decreased responsibility in certain areas of the business.
Finally, identify if the owner is in the growth stage or maintenance stage of the business. Either stage has risks, but there is potentially more risk with growth. An owner must ask themselves, “How much am I willing to risk to grow”?
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