You can't avoid risks in business, but you can mitigate them.
In Michael Gerber’s books, The E-Myth (1986) and The E-Myth Revisited (2004), he states that 80 percent of new businesses fail in the first five years and that 80 percent of those remaining will fail in their first 10 years. Stated another way, 96 percent of all businesses fail in the first 10 years. So, then - by definition - starting a business is risky. If you’re reading this blog, there’s a good chance that you’re a business owner, and therefore, it stands to reason that you are a risk-taker.
Somewhere along the path, you made the decision to start or buy a business. Perhaps you weighed all of the positives and negatives by taking a sheet of paper with a line down the middle listing the pros on one side and cons on the other. Perhaps you were forced into a quick decision because you suddenly found yourself unemployed. Perhaps you thought about it for 20 years and finally pulled the trigger. Regardless you somehow took that leap and became a business owner. Congratulations.
Perhaps you’ve made it through the riskiest first 5 years and way beyond, or maybe you’re only a few years into it. Regardless, it’s likely that many of the benefits of business ownership that were on the positive side of your initial thought process have come to pass. And hopefully, your business is providing the lifestyle that you dreamed about. If it is, chances are pretty good that many of those initial risk factors have lessened or maybe even disappeared by now. So your business is no longer in danger, right? Not so fast.
Sure the risks have changed, but I posit that there are new risks that have taken their place.
Some of the new risks may keep you up at night. And it’s likely that many of these new risks are out of sight, out of mind for you. So, let’s talk about some of the risks of owning a business.
I would classify a business owner’s risk in two broad categories - personal and business - and of course, there are items that should appear in both categories, such as debt. We can’t consider just business risks because it’s likely that you and your business are dependent on one another. The business likely needs you to keep the engine humming, and you likely need the business to provide for you and your family. In this week’s Maximize Business Value podcast, we talked about business risks, and next week, we’ll address personal risks that can impact your business.
Of course, there are the 5 D’s - death, disability, divorce, distress, and disagreement - but there are many more. This chart adapted from Chris Snider’s book Walking to Destiny, (2016) shows just some of the risks you face personally and in your business.
Of course, there are other risks you face personally and in your business, and each one of these items can be broken down into further risks. They are also intertwined. For example, if your business is dependent on you and suddenly tragedy strikes - would the business survive, and would your family be provided for?
If your business has a high customer concentration or is dependent on one customer and that customer leaves or goes out of business, would you suffer a significant loss of income? If a natural disaster occurs and your building is seriously damaged or destroyed, do you have a contingency plan in place to ensure continued operations? Increasingly there is a risk of data being stolen or held hostage. If that happens to you, are you prepared? If you are in a partnership or have shareholders and there are differences that become irreconcilable, what happens to the business and to your income? If the economy takes a dive, will it impact your business as well as your other investments? I could go on and on.
The point is - all of these risks can be addressed and either completely eliminated or significantly reduced. Insurance can solve some. Contingency plans can reduce others. Solid plans, processes, training, and systems can handle still others. But most business owners simply do not address these risks and they become roadblocks to growth or transition planning. If they are not addressed long before you decide to transition your business - they can become obstacles that may prevent you from transitioning on your own terms.
If your plan is to sell your business to a third party, or even to your family or management team, the business risks will be uncovered and dissected during due diligence. The buyer could terminate the transaction or require you to take additional risks in the form of contingent consideration such as owner financing or earn-outs. At the very least, the buyer will likely require specific indemnities from you for potential liabilities or expenses.
So knowing that there are significant risks that probably need to be addressed, why don’t more business owners do so? Chances are, you probably know many of the risks in your business now, and either feel trapped by them or choose to delay action until you “have time” to deal with them later. Equally, chances are high that there are risks in your business that you’ve never even thought about and could benefit from a fresh pair of eyes to help identify them. Many owners don’t even know the available options for handling specific risks and that’s when a good set of advisors really comes in handy.
When faced with a risk there are only four options for dealing with it. Accept, avoid, transfer, or reduce.
You can accept the risk and move on. I have identified risks in my businesses that, after weighing the options, determined that I was willing to accept that risk and potentially deal with it later. In my case, the cost of the solution was greater than the potential cost of the risk involved, so that was an easy decision.
You can avoid dealing with the risk altogether, choosing instead to bury your head in the sand and hope for the best.
If you do that, chances are you will transfer that risk to someone else - your employees, a future buyer, or worse, your family. If you choose to avoid a risk and a tragedy strikes, your family will be left to deal with it, likely triggering other risk factors for them. By the way - a side note here regarding tragedy. If something does happen, do your employees and family know your desires for how to deal with it and beyond? You cannot assume that the situation will be handled the way you desire if you haven’t clearly articulated your wishes in advance. There are ways to mitigate this risk as well.
Finally, you can spend time thinking about and identifying your risks so you can work through them and either reduce or eliminate them altogether. Addressing and resolving risks
early will ensure that they will not prevent you from transitioning on your terms.
So, stop right now, and take the next 27 minutes to think about the risks in your business. Use the chart above, and highlight the ones that would have the most impact, and develop a plan to reduce or eliminate that risk. You can also download our ebook on risks in your blind spot, or call on me if you get stuck. Identify the risks - you’ll be glad you did, and your business will be worth more once you’ve mitigated them. What are you going to do today - to Maximize Business Value?
And remember, we’re here to help. If we can help you in any way don’t hesitate to reach out!
Tom Bronson is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. Mastery utilizes proven techniques and strategies that dramatically improve business value that was developed during Tom’s career 100 business transactions as either a business buyer or seller. As a business owner himself, he has been in your situation a hundred times, and he knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Want to chat more or think Tom can help you? Reach out at tom@masterypartners.com or check out his book, Maximize Business Value, Begin with The Exit in Mind (2020).
Mastery Partners, where our mission is to equip business owners to Maximize Business Value so they can transition their business on their terms. Our mission was born from the lessons we’ve learned from over 100 business transactions, which fuels our desire to share our experiences and wisdom so you can succeed.