Reduce Your Risk with these strategiesChia-Li Chien, Ph.D., CFP®, PMP®, CPBC
Chia-Li Chien | Feb. 06, 2014
Making your business valuable from an investor or buyer’s perspective must be your ultimate goal. Otherwise, how will you be repaid for pouring yourself into the business year after year?
There are three major categories that impact business value:
- Increase recast EBITDA
- Employ high-yield capital
- Reduce Risk
For today, let’s concentrate on that last category—reducing risk—something that always seems to be top-of-mind for many of my clients.
So, what are some ways to reduce risk but still ultimately increase business value and the chance to cash out with financial independence?
Reduce risk through a niche.
One of the most practical strategies to increase sales and reduce risk is to enter a niche market. There is a saying “Niche is Rich!” so as you reevaluate your business and its value, check out your competitors and see if you are niched enough to continue to increase sales and guard against risk regardless of economic conditions or competitive pressures.
In Good Company is a New York-based real estate office rental business. They started in 2007 right before the real estate crisis began in 2008. They decided to enter a co-working space, an idea that had been around for many years, dominated by big real estate companies such as Regis and franchised companies like OfficeSuite.
To compete and increase their sales, they entered a niche in which “IGC could be both a community for women business owners ripe with learning opportunities and a physical co-working space where women could come to work meet and learn.” By 2010, they expanded one more floor to accommodate the increasing demand.
Their female business owner niche, as well as an emphasis on a work space that also includes networking and learning earned them a place at the table with other bigger players, but without the risk of having to compete head-to-head with them.
Reduce risk by benchmarking
Another practical strategy to reduce business risk is to benchmark higher than competitors.
A very good friend and colleague of mine is Mary, whose company has been on the top 50 fastest growing companies in the U.S. for two years in a row. In late 2008, when all the commercial banks were calling in their “line of credit” business (since the banks too wanted to reduce their risk), Mary was one of many small businesses that lost its line of credit. She was in a panic and anxious to find anyone who could provide her a credit line. She went to many commercial banks, but no one was even willing to take her application, except for one local community bank. Let’s name this community bank ABC.
Mary needed to maintain her $1MM line of credit in order to continue to fill her orders. Bank ABC required Mary to deposit $2MM cash as collateral before she could obtain the line of credit. We’re all scratching our heads at this point, because WE all understand that if Mary had $2MM cash, she wouldn’t need the $1MM line of credit. She ended up with a type of alternative financing from a non-bank financial institute. After several months and heavy fees from this non-bank financial institute (let’s name them XYZ), XYZ told Mary that due to her high customer concentration that exceeded the industry benchmark by 50%, they could only provide $500K line of credit instead of $1MM.
In the end, Mary finally got her line of credit and continued to fill the orders and grow her business. Sadly, she continues to be below the industry benchmark when it comes to the most critical financial ratio that every financial institute, investor or buyer is looking for. Despite continued success in her growing in revenue, unless she works on what’s important in her company, she just won’t have the value the investors or buyers are looking for.
The end game
I have found, without exception, that most entrepreneurs are risk-takers. So think of your end goal of selling or cashing out of your business as claiming your reward and compensating yourself for the risk you took in creating and running your business.
So do yourself a favor—reduce your risks where possible—and set a goal to be able to sell any time—profitably!