EP 45: Frequently Asked Questions for May 8, 2020

Ed Mysogland  0:01  
Please welcome please welcome welcome. This is another episode of the defenders of business value podcast, podcast where we talk about what makes a business valuable tips and tactics to increase your company's value that only veteran filmmakers know. And now here's your host in misos land. Welcome to frequently asked question Friday, I'm your host at my sick land, I help business owners make sense of the value in their company so that one day they can sell it when they want, how they want and to whom they want. Each week, I answer three questions about business value, or selling companies that come in from the website or social media. This is a little bit shorter of an episode, but hopefully, it will be helpful in your journey to making a saleable company. Alright, so let's get to it. Okay, so you probably, for those of you that are subscribing, you probably saw that I had just released a an extended, frequently asked questions, we did a an office hours and where I was taking questions, and we were fielding different things about value, as well as buying and selling companies. So so I thought I would share with you something that came across my desk that you probably don't know, and this is about risk. And as you know, with the conversations that I've had on the podcast for the last year or so, we're about business value and identifying risks that make your company, you know, prevents it from being able to be saleable. Now, in this current climate with this pandemic, nonsense, you know, it's a, it's a good time to reevaluate your company. And that's why I want to share this with you. So if you'll remember, business value is based on three things, it's based on earnings risk and expectations. Well, today I'm going to talk about risk. And this thing came across my desk from a buddy in Texas. And I would love to give attribution to where attribution is due but he doesn't know where, where it originated either. And it's just called 65. Company risks. So let's start with strategic risks. So corporate governance risk, that is the risk that insiders or employees won't act in the best interest of owners or stockholders, and the community. Number two, competitive risk, that's the general risk that you lose out to the competition. Innovation risk, the risk that competition will out innovate you intellectual property risk risk that is related to intellectual property, for example, the risk that intellectual property link leaks to competitors. Number five, merger and acquisition risk, the risk related to integrating firms. Funny thing about that is that I saw a statistic that roughly 80% of mergers fail because they can't integrate cultures. And, you know, for the conversations that we've had with a lot of people that are in the talent business, they would attest to just that, that it that your people are so important, and the culture is so important that you need to evaluate that when when buying or selling a company. Alright, number six, business risk, the risk that your overall business strategy and plan will be ineffective. Number seven, the economic risk, the risk that the economy will go into recession, in some cases, recessions benefit a business, for example, inferior goods, number eight, technological change the risk that technology investments will become obsolete. And I think we see a lot of that these days, especially with the with the with apps, let's take for example zum, zum, all of a sudden is a rocket ship and just doing doing great. Well, if you look at some of the other platforms, they left them in the US now, now what what made it so, so appealing well is ease of use and that made some of the competitors technologically obsolete, obsolete. Number nine, change of management risk this is the risk associated with with managing change. Number 10. project risks the risk that projects will fail. Number 11 risk or ethics risk, the risk that your guiding principles and ethics will be breached. Number 12 reputational risk, the risk of damage to your corporate image reputational risk can reduce trust in your business and lead to the destruction of value. We see that a a lot. And, and again, when some of the things that we see is when the owner is the is the business. And that's a reputational risk where, you know, the reputation of the company resides in a single person. And it's hard to transition that that risk to another sustainability risk. This is number 13, the risk that you fail to meet sustainable objectives and targets. These are now we're moving into financial risk number 14 profit risk, while obviously that's a easy one, the risk that profits will the general risk that profits will fall number 15 capital availability, the risks that you won't be able to fund your business obviously, that is a big one right now is that where access to capital Now granted, the the federal government and state government are, are interjecting and, and flooding the market with capital to keep the business open. But from a deal making standpoint, we have we have some challenges that SBA funding may dry up just by virtue of the the payroll protection and the disaster loans. Alright, number 16. Asset risk risks related to asset prices for example, real estate number 17 interest rate risk, the risk that interest rates will change probably for the for the the higher. But again, interest rates interest rate risk, number 18. currency risk, the risk that the change in exchange rates against your favor. For example, if your your costs are in US dollars, but your revenue is mostly Japanese yen, you want a strong yen. Number 19. Inflation risks the risks that prices increase in critical inputs, for example, energy in the transportation industry. Number 20. investment risk, the risk of change in value of investments for example, equity and commodity market risk, number 21. Equity or liquidity risk, the risk that you won't be able to sell an asset efficiently. For example, it quickly at fair price. This is a real big issue in selling an entire company because if you think about a public company, they're able to sell the company or you're able to sell stock in a company a public company by simply picking up the phone and calling your your stockbroker your investment advisor in a business it takes time, it is not an efficient process, it takes time to find that buyer and or buyers and unconsummated deal. Number 22. systematic risk the risk that the entire global financial system or financial system of a country will collapse. Number 23 concentration risk the risk of over lending to a small number of debtors or investing in a narrow selection of assets. Number 24 credit risk the risk that a borrower borrower will default on the debt. Number 25 fraud risks the risk of fraud losses 26 accounting risks the risk of accounting errors. Number 27 fiduciary breach risk, the risk that your firm will breach its fiduciary responsibilities for example, insider trading. Number 28. Counterparty Risk counterparty risk is the risk that other firms will break their contractual obligations to you. Number 29 tax risk the risk that your taxes will increase or an audit will reassess taxes in prior years. Now moving on to marketing and sales risks number 30. revenue shortfall risk the general risk that revenue will fall short number 31 demand risk the lower than expected demand for your products or

services. Number 32. Market competition risks the risk that the competitive forces will reduce revenue for example of price war number 33. sales forecasts risk the risk but sales forecasts will be inaccurate. And in this case it size matters you know it's for small businesses it is a real challenge to forecast the next 30 days much less move in two years. Number 34 new product development risks the risk that new products will fail on the market number 35 Customer Relationship risk, the risk the damaged relationships, the risk of damage relationships with customers. Number 36 brand value risk the risk of the decline of the brand value number 37 publicity risks the risk of bad publicity number 38 large account risk the risk of losing a large customer obviously we always talk about customer concentration issues if it's a if you have a customer that is in excess of 15 20% you have a problem. Number 39 location risk the risk of losing your location especially as it relates to retail. Alright now we're moving into operational risks infrastructure risks, the risks related to infrastructure such as electricity outlet outage. Number 41 Maintenance risk the risk of maintenance failure human error, for example, the human error in aircraft maintenance, product failure, the risk that your product or service will fail product liability, the risk that you will incur legal liability related to their products and services. Number 44. operational quality risk, the risk of operational failures for example, your website goes down number 45 production shortfall risk, you failed to meet production targets number 46. Logistics risk, the risk of logistics failure for example, you failed to deliver your goods to the retail locations on time for your customers or for their customers 47 procurement risk risk related to procuring goods and services. Moving over to information technology number 48. Architectural risks the risk that your architecture will fail to meet the business objectives 49. Data quality risks the risk of poor data quality, there are 50 technology quality risks, the risk that software and hardware quality problems, for example, failures, usability issues, etc. There are 51 platform risk, the risk of choosing technology platform that's not a fit for the purpose. Yeah, we've in our practice, we've lived that a few times. Number 52 information security risks, the risk of information security incidents. It's funny, I just recorded a podcast with with the folks from the Mako group and they are a cybersecurity firm and we're talking about the those risks and by probably in the next week or so, when that gets released. I mean, it'll it'll, it'll make you cringe when you know what these guys are, are fighting against. And you know, just the heightened risks that we we all have just using computers and cell phones. Alright, carrying on HR risks. Number 53. The workforce or workplace safety risk, the risk that accidents or poor environment environment impacts the health of the employees. Number 54. Employee reputation risk, the risk that you get a bad reputation as an employer and find it difficult to recruit top talent. Number 55. Employer liability risks the risk that you'll be sued for employment related practices or incidents. And as we're dealing with this COVID stuff, I mean, as employers, we all have to be have a heightened sense of what we need to do in order to protect the people that are coming to our office, as well as people that are that are working in the office. All right. 56 employment law compliance risks the risk of non compliance with employee employment related laws and regulations. Number 57. The risk of talent management risks the risk of losing top talent or 58. Compensation and Benefits risks the risk that compensation will be misappropriated. For example, a manager overpays related party number 59 Hiring risk, the risk that you will hire the wrong candidate or violate recruiting ethics or laws. Number 16. employee information privacy risks, the risk that that you will leak personal information about your employees. All right, this next section is compliance and legal risks. Again, compliance risk, the risk that you fail to comply with laws and regulations number 62. Mandatory reporting risk the risk that you fail to meet regulatory filing requirements, number 63 liability risk, the risk of lawsuits. And now this last bucket is catastrophic risk. Force Majeure acts of nature war terrorism. Guess we're living in that one right now. And the last one is political risk risk associated with political change. So any rate I hope, I hope you got something out of this, that there are and again, there's 65 areas of risk that that a business has, and I hope you found it as insightful as as I did. I know as I look at additional businesses and serving the people that that I serve, I know I'll be using this checklist that I'll have posted on the in the shownotes for you as a as a guide to evaluate certain risks. So I hope like I said, I hope you found this this useful and if I can help certainly reach out, let me know. Well, that about wraps it up. But before you go, would you like to receive a weekly newsletter of curated articles that I've stumbled upon or am writing about regarding business value and making a company saleable? Well, if so, go to defenders business value.com and sign up for the newsletter. Now, if you have a question that you would like answered, go to, again, the website defenders of business value.com and push the appropriate button. Or you can email me at ed at defenders of business value.com Or you can reach me at Twitter at Ed miso. Thank you so much for spending time with me. If I can ever be of help to you in any way please don't hesitate to reach out. Have a good weekend, and I'll see you next week.