Managing Key Risks
Managing Key Risks
Many business owners know they will have to exit their businesses at some point (whether by choice or nature). But many owners do not know whether they will have an EXITABLE business. There are so many reasons owners fail to build exitable businesses (CBInsights analysis). We believe it all comes down to knowing and managing risks; you have no real business if you do not know the risks and how to manage the risks affecting your business. In that regard, we assist our clients to plan, control, and monitor and actively manage these risks to increase enterprise value:
- Concentration Risks: Business is too reliant on any one customer, particular certification or contracting vehicle, supplier, distribution channel, accounts receivable, referral source, strategic partner, IT, employee or owner. Excessive concentration risk, in any form, destroys excitability and exit value. For a majority of small businesses, the “single owner” is the most significant point-of failure risk, which accounts for small business having low exit valuations and difficulty of selling.
- Revenue Model (Sustainability) Risks: Let’s be blunt – buyers of any company are buying the future stream of earnings, usually measured in earnings before interest, taxes, depreciation and amortization (EBITDA). Owners must be aware of the situations that could disrupt the future stream of earnings, as such events impact the sustainability of the business and therefore minimize the enterprise value. A small business with $334 million in revenue went down to zero revenue and eventually shut down when it lost its Small Business Administration 8(a) status.
- Business Model Risks: A Business model is how a business is structured to make money to compensate the owner for taking the risks. Entrepreneurs must continually ask themselves these questions: What business are we in? How can we exploit our core competencies? What business do we want to be in? What capabilities would we like to develop? All business models are subject to both internal and external pressures at times, requiring the owners to do a complete pivot, revamp an existing business model, or build a new business model just to stay alive and remain in business. Owners make assumptions about the target market, pricing, competition, quality of services/products, distribution channels, performance guarantees, asset acquisitions, rapid employment, and sometimes some or all the assumptions turned to be incorrect. In reality, so many small companies do not even know what their true business model is, much have the ability to plan, control and manage the risks affecting their business model.
- External Risks: All businesses operate in an environment and are therefore subject to external risks. Something can always go wrong, and often these bad things are not only external to the business but also things over which we have zero control. Some of these risks are manageable, but most are probably uncontrollable. Nevertheless, it is vital that business owners and managers identify these risks early on and keep an eye on them. Understanding and actively managing the debt structure, interest rates, debt maturities, debt service requirements, capabilities and a robust relationship with lenders is crucial for all business owners.
- Leverage Risks: Taking on debt (loans, line of credit, etc.) can be a good thing as it creates financial flexibility to finance growth. But adding debt to your company’s financial structure also adds risks. When those assumptions for taking on the debt turn out to be wrong and profits are delayed or less than anticipated, the burden of that excessive optimism comes home to roost. Too much debt can put enormous stress on cash and cash flow, eventually threatening the viability of your business.
- Excess Capacity Risks:Businesses are composed of integrated parts.Every business has underutilized assets, staff or excess production capability that can be made more productive, outsourced, or eliminated from the business’ costs or capital structure. A key component of managing and leading an exitable company is correctly identifying where the business should allocate its resources. If resources (such as staff) are idle or lacking in productivity, a great business owner will strike immediately and remedy this issue. In reality, a majority of businesses, especially small and upcoming companies, do not have planning tools such as budgets to anticipate, mitigate and monitor these situations, focusing them to hire and fire staff based on winning and losing a contract.
- Compliance Risks:These are the risks arising from noncompliance with laws, regulations, policies, procedures and contracts. Examples include: • breach of contract provisions• breach of statutory requirements • litigation risk • BPOL tax problems • federal, state and local tax penalties • workplace health and safety • quality standards, and •environmental standards. In many cases, businesses that fully intend to comply with the law still have compliance risks due to the possibility of management failures. It can be a significant challenge for companies to identify, prioritize, and assign accountability for managing existing or potential treats related to legal or policy noncompliance—or ethical misconduct—that could lead to fines or penalties, damage to a reputation, or the inability to operate in key markets.
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JS Morlu, LLC
2200 Opitz Blvd, Suite 200
Woodbridge, VA 22191,
Email: [email protected]
Hours of Operation:
Monday – Friday, 9 AM – 5 PM