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Protect your value: Stage two of value maturity

February 18, 2019

By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader

Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.

Lately, I have been struck with the awesomeness of the human body — how all the various systems that keep us alive, healthy, and thriving are all interconnected.

Consider the circulatory system, for example. This system is vital to our very being, feeding organs throughout the body. The health of our heart and circulatory system directly impact the health of the rest of the body. If something is running amok in the circulatory system, the rest of the body is likely going to go down with it.

This came to the forefront as I witnessed a close friend, Lyle, going through a series of medical challenges. Lyle has had high blood pressure most of his adult life, but it never caused him issues. He’s as active as ever, exercises regularly, and generally enjoys life — until recently. Out of the blue, he had a mild stroke that fortunately left no material damage. In the course of the diagnostics, a baby aneurysm was detected that warranted treatment.

The treatment for aneurysms is fascinating. It includes filling the bubble and using a sheath/stent to safeguard the filling and the vessel from further distension. All great news for Lyle, but if he doesn’t take other steps to protect himself or work with his medical team to address the blood pressure issue, he’s vulnerable. The filling could shift out of place, the bubble could stretch, there could be other potential future strokes, and, according to recently published research, there’s a higher risk of mild cognitive impairment or dementia.

I share this story because our companies — whether we own them or just work in them — operate as a living organism, too, with their own circulatory and other major systems. Our survival depends on those systems being healthy and our efforts to protect ourselves.

In prior posts, I introduced the concepts of the five stages of value maturity of a business and expounded on the first stage — Identify. For Lyle, the Identify stage was the battery of physical exams and tests he underwent to assess his overall health and the strength of his systems. The results were clearly mixed — his heart is strong and other vital organs reasonably sound, yet his blood pressure and circulation situation are concerning.

The same is true of a company going through Stage One. Like Lyle emerging from the doctors’ office with a diagnosis and plan of action, your company emerges from Stage One with a standard set of deliverables — a valuation of your business; a comprehensive assessment of your business strengths, weaknesses, and risks; and a solid business/strategic plan to improve your results and drive your goals. Aspects of the business are reasonably strong and other aspects present risks.

The focus of Stage Two — Protect — is to identify and act upon those activities in your business plan that first and foremost protect your company, its operations, and its sustainability. Your priority is to mitigate risks to your operations and the transferability of the business.

Your business operation risks are multilayered. You likely have policies in place to insure your vehicles, commercial liability, employee practices, directors and officers, and cybersecurity risks, to name a few. Hopefully you conduct an annual policy review to be sure your levels of coverage and plan designs evolve with the growth and changes in your business. When you set up or renew these policies, you and your insurance provider likely review and implement additional risk mitigation steps, procedures, and training to protect yourself and the business.

Life insurance is also an important component of the Protect stage, particularly for the owners and other key personnel. Buy-sell and shareholder agreements routinely outline the parameters of who may buy the shares of the other owners and what occurs in the unfortunate scenario that one of the owners dies. Does your shareholders’ life insurance align with the agreement? Are policy levels appropriate for the current state and value of the business? Are you current with certifying the value of the business according to the agreement? If the answer is “no” or “maybe,” one task in your Protect stage should be to review and ensure that these elements are current and working together.

Insurance, however important, is only the first layer of understanding your operational risk. There are other risks to be considered, such as customer concentration, market dynamics and competition, data management and cyber security, reputation, and financial, to name a few.

Lastly, the risks threatening the transferability of the business demand top attention during the Protect stage. Mitigating your transferability risk takes the longest time to address. For example, if there’s too much dependence on you, the owner, or if your management team is thin in some way, transferability is seriously threatened. Strengthening it should be a priority. This involves hiring or training staff, transitioning responsibilities, and building competence and confidence in the team (and the team in themselves), which all takes time. Another example is enhancing your customer and supplier relationships so that there are multiple points of contact in your company, diffusing the risk of too much dependence on any one person for the relationship. Again, this takes time.

Stage Two is a stage of action, whether applied to an individual or to your company. If the Identify stage was Lyle’s wake-up call, then the Protect stage is where the rubber meets the road. In Lyle’s case, he needs to act. He must work with the physician to build a prescription, dietary, and exercise plan that addresses his blood pressure issues. Next, he must make the personal commitment to take his medications religiously, change his diet, and work out on the agreed-upon schedule. Then he’s got to do so.

Your business risks are similarly prioritized in Stage Two and segmented into a 90-day action plan. Accountability measures and routines are put in place to ensure that strong progress is made. Actions and results are monitored and adjusted so that the company’s health risks are mitigated.

There is a reason Protect is Stage Two, placed ahead of growing the business. Moving to Stage Three — Build — before protecting yourself is foolhardy and dangerous. It would be as if Lyle tossed away the medications, went back to his “McD’s is a basic food group” diet, and blew off the recommended procedures in the hope that the aneurysm will just go away. Anyone watching from the sidelines would rightly judge Lyle a fool. Yet how many businesses take on sales growth initiatives because “that’s what we do” and ignore working on the health risks facing the company because “I’ve got work to do”? That’s setting your business on a path of aggressive growth when the infrastructure can’t support it. In both instances, the stress could kill you.

Be wise, one stage at a time. Protect yourself.

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