Most people think that starting a business is risky.
But unless you invest a significant amount of startup cash, you’re not really risking much other than your time and probably some savings that you can eventually replace.
That changes, though, if you’re lucky enough to get your business off the ground.
As your company grows, you risk more and more of your wealth because the business you’ve built is worth something, and hungry for cash.
The longer you hang on to it, the more you have to lose. This is especially true in family businesses.
This phenomenon makes owners become more risk-averse as their business grows, potentially squeezing off growth to avoid risking what they’ve created. This can mean the owner goes from the company’s biggest asset to its biggest liability.
TOO BIG TO MANAGE?
Florida-based Cigar City Brewing is an example of how growth can affect an owner’s appetite for risk. Founder Joey Redner’s craft beer operation started in 2009 with the relatively modest goal of selling 5,000 barrels per year.
Cigar City proved popular with the locals, and Redner sold 1,000 barrels his first year.
Cigar City Brewing continued to grow but was thirsty for cash, eventually forcing Redner to take a Small Business Administration loan.
Redner quickly surpassed his 5,000-barrel goal, and by 2015 had scaled all the way to 55,000 barrels per year, at which point he ran out of capacity in his brewing facility.
SECURITY OVER MORE DEBT
To get to the next level, Redner needed another $20 million for a major expansion, but he was tired of the feeling of being “all in” at the poker table.
He had built something successful and wanted to enjoy financial security rather than having to roll his winnings into even more debt that he would have to personally guarantee with the bank.
Redner decided to sell, even though his business was still growing and had built a brand that Floridians loved.
Selling is one option for owners to reduce risk on the wealth they are building.
However, another way is to continue to own the business and reduce risk by focusing on value drivers. Implementing these drivers will reduce risk now and for potential future owners, whether they are family, key management or a third party:
One of the biggest deterrents to value is when all business knowledge and relationships reside with the owner.
Succession takes time. Don’t start when you are ready to depart the business. That’s too late.
You need time to mentor, transition, observe and coach.
If you don’t get it right the first time, you’ll need to restart the clock and do it again.
And if you don’t get started on this early, you risk losing key employees, including your children, in the business, because they don’t see a future or don’t trust that it will happen.
CULTIVATE YOUR POINT OF DIFFERENTIATION
Acquirers do not buy what they could easily build themselves. If your main competitive advantage is price, an acquirer will rightly conclude it can simply set up shop as a competitor and win most of your price-sensitive customers by offering a temporary discount.
Michael Porter of Harvard Business School said an effective strategy is “unique and valuable” in the eyes of the customer.
When you are differentiated in the marketplace, you stay out of the commodity trap. Pick your niche(s) and own it.
Acquirers want to know how your business will perform after they buy it. Nothing gives them more confidence that your business will continue to thrive post-sale than recurring revenue from subscriptions or service contracts.
Recurring revenue for you today means improved cash flow and predictability, significantly reducing risk.
In addition to having customers pay on recurring contracts, the most valuable businesses have lots of small customers rather than one or two big ones. Most acquirers will balk if any one customer represents more than 15 percent of your revenue.
Risks of having major customers include losing them to a competitor, losing them to an acquisition or having them making high demands, including price concessions.
Any of these scenarios likely would have a large negative effect on the business.
REAPING REWARDS TODAY
These are a few of the value drivers that can make a big impact on your business.
By getting started on implementing these drivers with a focus on incremental improvement in these areas, you both position your business for a transition in the future at a higher valuation, you reap rewards today in terms of reduced risk, better financial results and more freedom.
Tom Garrity is managing partner of Compass Point Consulting LLC in Hanover Township, Northampton County. He is a certified coach with Gazelles International and a certified exit planning adviser with the Exit Planning Institute. Compass Point provides growth and business transition consulting to small- and medium-sized businesses. He can be reached at 610-336-0514 or firstname.lastname@example.org.