Uncertainty, risk, and the impact on business value
April 9, 2020
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.
As an avid Exit Stage Right reader, you are accustomed to topics focused on growing the value of a business as well as how a prospective investor views the value of your business.
To refresh, the simplest way to explain how value is determined is to take some flow of rewards, such as your revenue, net income, cash flow, or earnings before interest, taxes, depreciation, and amortization (EBITDA) times some multiple. The multiple is a function of the perceived risk in the investment and is comprised of several components, the most influential being what is called company-specific risk.
While you have little control over the risk ratios for the market or company size, you have tremendous control over the company-specific risk. Additionally, you have control over the reward side of the equation through the decisions you make about which sales to pursue and at what margin, what expenses to incur, and what capital investments to make.
Yet, these days, it doesn’t feel like we have control, does it? We’re constantly bombarded by the uncertainty swirling around the globe. Between politics, COVID-19, and stock market news, there is a steady diet of uncertainty coming your way, and in this case saying “you’re not alone” frankly doesn’t offer any consolation knowing that your customers and vendors are feeling just as off balance as you.
Surviving this patch of uncertainty pivots on how ready your company is to withstand disruption. Ironically, these survival skills are the same ones that contribute to growing the value of your business and being attractive to a future owner. The difference is that in times of uncertainty, these shared value drivers are put to some serious stress testing.
Consider these key value drivers:
Customer concentration: Having a more diverse customer base is more valuable than one where one or two customers make up a substantial portion of your business. For example, you might sell novelty soaps and your biggest customer (30-plus percent of revenue) is one of the big cruise lines. Travel plans are unraveling at an insane rate right now and that biggest customer may go down with the ship. Are you agile enough to pivot to an online sales and promotional model to replace volume quickly, or retool production to supply other products to other channels needing soap?
Vendor concentration: Vendors always take a back seat to customers, even when thinking about concentration. However, it is equally vital to ongoing operations and profitability. Many businesses are dealing with the harsh reality of supply chain breakdowns caused by work stoppages in China tumbling over to material shortages upstream. Even if you don’t source your materials from China, what happens if your key supplier has work stoppages of their own because of employee sickness?
Employee concentration and strong HR programs: One young, healthy man in China said that the coronavirus knocked him flat for three weeks. How strong is your management team to fill in if you’re the one that becomes ill? How flexible is your workflow? Are people cross-trained to be able to fill the gaps if others are out ill?
How open are you to agile work arrangements? Can the work be performed from the safety of one’s own home? If not, how will your policies adapt as employees show signs of illness? Can you afford to have people show up to work feeling under the weather — because they will. If you can’t afford that, what can you afford as a way of incentivizing people to stay home to protect the rest of your team?
Systems and procedures: The need for strong, documented systems is never more real than when people need to step into a colleague’s shoes and do their job. Understood and shared processes and procedures allow for consistent execution and quality. They also provide a resource for accelerating a learning curve under duress as co-workers fill in for others. Yet this is an area most businesses shove to the back burner because there are other priorities. Like vendor concentration’s ugly cousin, there is denial around how important this value driver is.
There’s no doubt in my mind that there are many conversations going on in companies across the globe about how to deal with all the uncertainty. Hopefully your company is one of them and you have strong communication programs to keep your employees, customers, and vendors calm. Brainstorm around the issues above and develop your short-term contingency plans. Grab hold of the uncertainty head on.
Consider the next several months to be a learning opportunity of sorts. (Yeah, I know. I hate it when something is a “learning opportunity.”) But the fact is real. Uncertainty stretches our bandwidth and forces us to consider things we hadn’t in the past. Uncertainty, well-harnessed, challenges us to try things we wouldn’t otherwise have and then make the best out of it. This is one of those times. Take lots of notes on how you mitigate your risks. Those are your clues to driving your business value.
In the meantime, stay healthy all!