De-Risking the Business: How to Protect What You’ve Built
Most business owners think growth is the priority. They chase revenue growth and P&L expansion, but they’re not always the value drivers that matter most to buyers and investors. As Mike Blake, valuation expert, said in our panel, buyers pay for proof, not potential. And proof comes from reducing risk.
Why Risk Matters More Than Growth
Buyers lower their offers when they see risk, so mitigating risk is the first hurdle to building a business someone else would actually want to buy. It’s important to do this even if selling your business isn’t on your radar. That’s because many businesses are forced into transition because of the 5 Ds:
Death: a partner passes and the surviving spouse is left with shares but no liquidity. There are few assets outside the business. Disagreements quickly ensue. Where will the buyout cash come from? The surviving partner may lose financial security if their family depended on business income. And the business itself is weakened, because the partner who worked in it is suddenly gone.
Divorce: when one partner divorces, they may need to sell their ownership stake. That can destabilize the entire business if no agreements are in place.
Disability: a partner becomes sick or injured and can no longer work. Without disability income or disability overhead insurance, payroll and expenses still have to be paid. If the disabled owner still receives K-1 distributions without contributing, resentment builds. Even if their salary is generously continued, self-insuring can create significant financial and legal strain. And if the disability forces a buyout, where will the cash come from?
Distress: external shocks, from recessions to supply chain issues, can erode margins quickly. Without cash reserves and contingency planning, distress exits destroy value.
Disagreement: partners who once aligned may diverge. An outdated operating agreement leaves no clear path forward, leading to expensive and destructive disputes.
Growth without certainty is a house built on sand. You’re not ready to focus on growth until you’ve de-risked the business, but that process can’t stop with the 5 Ds.
The Biggest Risks Owners Overlook
There are other common risks that often don’t even occur to owners, but they’re sure to set off a buyer’s alarm bells. These risks include:
Customer concentration. If one or two customers drive most of your revenue, you are exposed.
Key person dependency. If the business depends on you or one employee, there is little value without that person.
Lack of clean financials or outdated systems. This is one of the most common issues. Every year, owners should be cleaning up their books and reviewing EBITDA. Better yet, they should calculate recast EBITDA, which is the true number adjusted for add-backs. Without clean books, buyers do not trust the numbers.
Weak or outdated contracts. Short-term or verbal agreements make a business fragile.
Buy-sell agreements. Many owners have insurance policies written, but no actual agreements to legally enforce how that money moves. That is malpractice. A funded buy-sell must be legally documented, and it must address disability as well as death.
Operating agreements. Most owners have not reviewed them in years. Business relationships change. These agreements should be reviewed every three to five years, just like estate planning documents.
Estate planning and insurance protections. Documents should be updated every two years. Without them, families, partners, and employees are left vulnerable.
Governance and succession planning. What training is in place for your human capital? Is there a management team ready to step in? Governance should be reviewed by legal counsel every few years, no different than operating agreements.
Valuations. Getting a periodic business valuation, every several years, ensures you know the actual value of your business and can track progress.
How to De-Risk Your Business
Before you move to a growth focus, take these steps to secure your foundation:
Review and update buy-sell and operating agreements regularly. Every three to five years is ideal.
Fund buy-sell agreements properly with insurance, and make sure they address disability as well as death.
Review estate planning documents every two years. Make sure families are protected.
Put insurance protections in place for both income replacement and overhead expenses.
Build systems and documentation so the business does not rely entirely on you.
Diversify customers and revenue streams.
Establish governance and succession planning.
Build and train your leadership bench.
Get periodic risk assessments and valuations to track progress.
Comprehensive de-risking ensures that when growth does come, you’re building on a strong foundation instead of fragile ground. Start de-risking your business now to protect your family, your employees, and your legacy.
Let's talk!
Phone: (770) 587-0281
Email: mmoore@artisanfsonline.com
1125 Cambridge Square, Suite C
Alpharetta, GA 30009
