After helping professionals and business owners exit their firms over the past 29 years, I’ve found there is one thing that, above all, can destroy firm value. This thing is often hidden to the owner, but something that every buyer looks for. Most people don’t appreciate the impact this thing has until it’s too late – when it strikes and there’s no turning back.
What is it? . . . Risk.
You’re probably thinking: “Come on. I’ve got lots of insurance policies and I’m careful.”
But here’s the thing. Risk exists in all business relationships and transactions. So, while you can buy insurance to transfer some risk to an insurance company, there’s so much more that can be done to protect your firm.
Firm value is a function of cash flow and the risk of it continuing into the future. You could have a very profitable firm that isn’t worth much because there’s a serious question whether your customers will continue to buy, or your team will remain in place. Or, perhaps, one customer represents to much of the firm’s gross revenue and the loss of this customer would be disastrous.
We humans are very good at seeing risk staring us in the face when it’s a lion across the field. But we usually don’t see hidden risks. For example, many people fear flying but easily jump into a car traveling on the interstate. Yet your risk of dying in any year in a plane crash is one in 11 million and one in 103 in a car crash – 107,000 times greater.
One crucial way you can improve firm value is to reduce common uninsurable risks, such as:
- Unreasonable terms in contracts,
- Contracts that can be terminated by customers at will,
- Employees stealing your firm’s trade secrets, customers, or other employees,
- Lease terms that give the landlord the unfettered right to reject your buyer or jack up the lease rate,
- A partner dispute,
- Litigation in a far away location or that seeks extraordinary damages, or
- Contract breaches arising from misunderstood terms or improper contract administration.
Our Outside General Counsel Program is designed to help you reduce the risk in your firm and increase its value. Call us at 407-649-7777 if you’d like to learn more about how this program may be able to help you improve your firm and its value.
