After identifying your business’s baseline value, you must protect that value by mitigating any risks associated with it.
It is in this stage of the Five Stages of Value Maturity in which business owners and advisors create a prioritized action plan to organize risks.
Risks are divided into three categories: personal, financial, and business. CHRISTOPHER SNIDER writes in Walking to Destiny, “protecting value is the first step in building value.”
The Five D’s
To best protect your value, you must consider the 5D’s: Death, Disability, Divorce, Distress, and Disagreement. Even if you do not think you will be affected by one of the 5D’s, without preparing for the worst, your value will be negatively impacted.
Rochelle Clarke states, “The first area that I look at when a client walks in the door, is whether the business is protected from unplanned risks. Clients usually agree that it would be a waste to invest in long-term planning if an unplanned event could quickly derail the business and render those plans useless. The most comprehensive way to protect a business’ value is via a thorough, well-structured contingency plan that’s officially known as a Business Continuity Plan.”
Kevin Minton suggests that all businesses involving partnerships must create a Separation Agreement. He continues, “If you don’t have a partner and you have to go it alone, you can protect yourself from some of these, such as death and disability, with insurance. Divorce is a little tougher unless you have sufficient means to capital sources to cover a 50% buyout or may be willing to sacrifice more on the personal side to protect from spousal interest. Distress can come in many forms such as personal, mental, partner, business deterioration, financial or other.”
Do You Have a Prioritized Action Plan?
A prioritized plan helps focus an owner’s resources on the most impactful items to protect and ultimately build value in their business. Creating a prioritized action plan also provides peace of mind for owners.
Craig West classifies risks into two categories. He shares, “Risks should be classified according to likelihood and impact - those with the highest likelihood of occurring and the highest impact on the business should be addressed first. In many businesses, there are literally hundreds of different risks, and the process of prioritizing them ensures we work on those most likely to have the largest impact on value first.”
Rochelle Clarke starts with the most comprehensive action: creating a business continuity plan. She shares, “This serves as an operational contingency, and it delivers the most impact across the organization quickly. Additionally, it helps uncover information about the company’s operations that may be valuable during the engagement.”
Erik Owen believes the prioritized action plan helps owners focus on what is truly important in their business. He continues, “Often, simply building a plan creates focus. Forcing the management team to put down in black and white what they understand (and showing them what they aren’t thinking about) can be very powerful and help separate the important tasks from the urgent ones.”
There is Such a Thing as a “Good Risk”
How much would you risk in order to grow your business? No improvements to your business can be made without some amount of associated risk.
Kevin Minton shares, “During the protection phase, I would be willing to take on debt if I believed that I could recapture it with a profit or protect my investment. I would hire more employees and continue to invest in machinery or facilities provided it would protect the ability to generate an acceptable financial return either during my projected tenure as an owner or during a transition to another owner.”
Erik Owen states, “Taking on risk depends on the risk profile of the client and the advisors, economic conditions, industry, resources, and time frame available. Usually, the owner is more comfortable with risk than their team or advisors. However, the advisors often have a broader view and can bring solutions for more balanced risks than the owner.”
Protecting Personal Value
While protecting your business from risk is a crucial component of building value, owners often forget to consider their personal and personal financial risks.
Michael Stier shares, “In addition to focusing on risks to the value of the business, we strive to also engage with the owner regarding the personal side of exit planning. If the owner is receptive, we will take on the role of “coach” or “quarterback” for the owner.
To educate and encourage the owner(s) to be more proactive with their own personal planning – both with financial and estate planning, but also with their “life after exit” considerations.”
Are You Protecting Short-Term Value or Investing in Long-Term Returns?
Protecting the value of your business is an important task regardless of your timeline for an exit. Most risk mitigating measures impact both short-term value and long-term value in a business.
Rochelle Clarke shares, “Savvy business owners give themselves the best chance to maximize growth and value by incorporating risk mitigation in their overall business strategy.”
One of the most effective ways to protect the short-term and long-term value of a business is to ensure that it can be run effectively without the owner.
Decentralizing the business owner prepares the business for the owner’s eventual exit in the present. Thus, the business would have written procedures, detailed financials, and a customer base that is not solely the owner’s responsibility.
KEY ELEMENTS OF THE PROTECT STAGE
- Taker a shorter-term point of view and mitigate risks
- Define the risks as business, personal, or financially based
- Develop 90-day action plans on 2 concurrent paths: Business and Personal/Personal Financial
- Create contingency plans around the 5 Ds
- Formalize your exit planning advisory team
- Ask yourself, “How much am I willing to risk in order to grow?”
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