Risk Assessment Is the Captain of Your Business Transition Ship

Any business transition can be a complex process. To avoid problems, it’s important to assess the risks involved. This means thinking about all the things that could go wrong. Once you’ve identified the risks, you can take steps to mitigate them. Business Owner Succession Strategies helps you do this.

By planning ahead, you can help ensure a smooth transition for everyone involved. 

Imagine you are the captain of a sailing clipper that has just crossed the Atlantic Ocean from London to Richmond, VA, in three weeks during October 1820. You’ve survived near-hurricane storms, doldrums, pirates, and all sorts of challenges, navigating and guiding the ship and its crew to within a day of the harbor. The ship’s barometer is falling fast and a storm seems certain before you reach port. Instead of remaining on the quarterdeck, you instruct your first mate to inform you when the ship docks and you retire to your cabin for the rest of the voyage.

Or better yet; you are the captain of the Titanic. The glorious ocean liner has left Liverpool, on its way to New York. Persuaded by the owner of this brand-new, “unsinkable” ship and seeing nothing but open seas in front, you give orders to increase speed and let the ship “stretch her legs” as it grows dark. Without a second thought, you leave to join other passengers for tea for the evening.

In both situations (one of which resulted in a documented disaster), the crucial missing element to each decision was risk assessment—understanding all the potential risks and consequences that could derail an otherwise successful venture with significant potential for the stakeholders.

In a business transition to a new owner, assessing risks is critical to the founder/seller to guard against the unexpected during this complex process.

Understanding a Business Transition

Let’s define a business transition: It constitutes a sale, merger, or succession of an ongoing business concern, where the founder/owner/seller steps away for new owners to manage the business into the future.

Success in this endeavor means facilitating a smooth transition for all stakeholders, not just the seller(s) and buyer(s). Stakeholders also include the employees, the customers, vendors, and suppliers—anyone whose own livelihood depends upon the continued functioning and growth of the business.

What Is Risk Assessment?

Risk assessment is identifying and thoroughly understanding the implications of all the potential threats to your business and its operations. These risks can be both internal and external and might occur from anywhere. They can be natural (think hurricanes or pandemics), or man-made, like cyber attacks, adverse government regulations, or employee theft.

Assessing risk not only includes identifying these disruptors, but analyzing their potential for occurrence and the potential impact. Some may have a greater chance of happening, but with light impact, so mitigating their influence may be simple, whereas others (say a tornado) may have a low chance of impact but would carry devastating consequences. Once the risks are identified and analyzed, contingent mitigation strategies can be formulated.

Types of Risks in Business Transitions

Let’s summarize the various risks that could impair a business transition:

• Financial risks: Valuation discrepancies, purchase funding issues or shortfalls, cash-flow interruptions, deteriorating conditions in the specific business sector or overall economy.
• Operational risks: Continuity of operations, retaining key employees, retaining essential skills or technical knowledge, integration challenges, filling the owner/seller duties.
• Market risks: Specific market sector volatility, competition, changes in demand for business products or services.
• Legal/regulatory risks: Compliance issues, contractual obligations, intellectual property concerns.
• Reputational risks: Brand image, customer perceptions, media scrutiny, potential for key employee(s) to leave and re-emerge as competitors.
• Owner’s transition inexperience and mistakes: This may be the first time an owner has transitioned a business, so risks of mistakes or misjudging the decision arise. We discuss some of these here.

These are all real risks to most businesses and need to be considered and analyzed by both the seller and the buyer to foster goodwill between the parties and experience a successful transition.

The Role of Risk Assessment in Business Transitions

Risk assessment plays a critical part of the process for all involved. These elements include:

• Early identification: Spotting potential problems early in the transition process. This provides time for discussion and evaluation, reflection, and creative problem-solving to find solutions.
• Informed decision-making: Utilizing data and statistical analysis can help formulate insights and revelations that are not readily apparent, even to experienced insiders.
• Mitigation planning: Developing action plans to mitigate or possibly eliminate potential risks. Here the adage of “Forewarned is forearmed” is truly applicable. You may never have to open the “contingency playbook,” but having the plan ready provides confidence and assurance to all involved. And on that note…
• Stakeholder confidence: Uncertainty and fear of the unknown affects all humans in many ways. Evaluating risks and having mitigation strategies in place can build trust between the transition parties (buyer and seller) as well as employees, suppliers, and others that the business will continue to thrive after the transition has taken place.

Here is where an experienced outside partner such as BOSS (Business Owner Succession Strategies) can be of immense help to the process. Having a knowledgeable advisor to provide insights and guidance to all the nuances of this process can yield considerable benefits.

Steps to Conduct a Risk Assessment

Here is a summary of logical steps to a great Risk Assessment Process:

1. Preparation: Gather relevant data about the business and assemble the risk assessment team. Include attorneys, tax experts, key employees, and your financial team.
2. Risk Identification: List potential risks related to the transition. Brainstorm with your assessment team with an open mind to any potential risk (you can always pare down the list later).
3. Risk Analysis: Evaluate the likelihood of each risk and its impact on the business. Consider opinions and recommendations of your advisors outside your area of expertise; many times an outside opinion brings new insights and “out-of-the-box” thinking.
4. Risk Priorities: Rank the risks based on potential impact, but do not neglect frequency either. Sometimes frequent small impacts morph into a significant impairment later on.
5. Mitigation Strategies: Develop plans to address and reduce/eliminate risks and their impact.
6. Monitoring and Review: Implement monitoring procedures and schedule periodic reviews to assess ongoing risks and update mitigation strategies. Involve as many stakeholders as practical in the process, even former owners (especially if the transition involves buyer-financing). Their experience and insights could be invaluable later on.

As you can see, transitioning a business can be a complex undertaking. At Business Owner Succession Strategies, we help business owners like you plan for the future of their business. To learn how I can help you sell or pass on your company, don’t hesitate to get in touch.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized legal advice. Business Owner Succession Strategies and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation.