If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #12 post I discussed how your ETA Metrics/KPIs allow you to establish a scoreboard for your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). In today’s 30 Days to ETA post, a wise person once told me, “Somebody else’s experience is a far better teacher than your own.” I wish I had listened to that advice. If I had understood the vital role of a business risk assessment in the purchase of a business, I might have avoided making the single biggest mistake of my business career… Enjoy!
An Expensive Education
Many years ago, I had the opportunity to purchase a business. It appeared, by all standards, to be a very good opportunity for me. So like any prudent business person, I began gathering intelligence on the business and conducting due diligence. I looked at everything in the company — From interviewing employees and customers to looking at the financial statements. I went through this business with a fine-tooth comb attempting to leave no stone unturned. I also thought I was being prudent by seeking counsel from my ETA Professional Team of attorneys, CPAs, and other professional advisers.
It was during this due diligence phase that I can remember asking myself, “Do I really need to buy this business? Should I really add this much stress to my life?” Like an angel sitting on my shoulder, my conscience warned me over and over against purchasing the company. I began to focus on the pros of buying the business. To my detriment, I ignored the red flags I saw in the list of cons.
Long story short, I came really close to purchasing the company. What seemed like minor discrepancies in the business assessment at the beginning, ended up becoming MAJOR problems at the end. These problems caused lots of harm, lots of grief, and lots of brain damage. Ultimately, I was glad that I had listened to my gut and the risks that appeared in the assessment I conducted. If I hadn’t, I would have bought the company. The excitement for the potential of making more money, though, almost got the better of me, and it nearly cost me years of my business life.
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ETA Risk Mitigation
In 30 Days to ETA, we Entrepreneurs Through Acquisition face risks in many different shapes and sizes. Depending on the industry, harm could befall us in unusual ways. For instance, you could face environmental or weather-related risks. National or global-economic crashes could take the legs out from under the business you’re considering. Changes in employment, political parties, market competition, or the like could also pose risks to businesses.
No matter what business you’re in, each will face risks. And dealing with the risks is what a successful Acquisition Entrepreneur does. More often than not, you’ll deal with the legal implications or ramifications of the risks. Some must comply with OSHA, HIPAA, or the Patriot Act. What about the Equal Opportunity Act or the Labor Standard Act? Regardless, all business owners have to deal with national or state laws that create risks in their companies, so preparation is the best plan for Entrepreneurship Through Acquisition.
Before we can manage risk, you must identify the risks and comply with the laws that govern them. The biggest mistake most make is not looking at all of the potential risks involved with buying a company, and the risks you ignore have to do with legal risks. Most of see the upside, but rarely see the full potential of the devastation of the downside. You must be aware of all of the various types of potential risks, and you must follow the laws that govern the risks. As an attorney friend of mine says over and over, “Ignorance is not an excuse not to obey the law.” We definitely have our hands full.
The great ETA Alfred E. Neuman said it best…
‘What, Me Worry?’
Sam Palazzolo, Managing Director @ Tip of the Spear Ventures
Risks Monitoring
So what are we Entrepreneurs Through Acquisition to do with the ETA Risk Mitigation we discover? Whether you’re preparing for a business merger or acquisition, you should sit down with every business you’re considering placing under Letter of Intent (LOI) and do a new risk assessment of the company. The reason I recommend looking early and often is because risks change. The state the business operates in may have issued new employment laws, or a competitor may have opened their doors since the last risk assessment. What if interest rates have changed or new tax laws been issued? With so many different types of risks, where do you start?
Business Risk Assessment – 6 Steps
- Consult outside counsel – Start with a good insurance agent who works to protect you from risk on a daily basis. Then, talk to your attorney, CPA, and a CERTIFIED FINANCIAL PLANNER™ to identify and forecast potential risks.
- Seek internal advice – Rally your family and your team, and perform a S.W.O.T. analysis. Identify Strengths, look for Weaknesses, find Opportunities, and guard against Threats.
- Weigh probability – Rank your identified risks in order of how likely they are to occur. Start with the most likely. Finish with the least likely.
- Predict harm – If your greatest risk is not harmful to the company, don’t devote countless time and energy to it. Instead, manage the risks most likely to cause harm.
- Address the risk – Don’t ignore any of the risks. Use your rankings and predictions to decide which ones need immediate attention, but don’t turn a blind eye to any risks.
- Monitor for changes – Shoot for yearly risk reviews to keep up with legal, economic, or political changes.
How ETA Risk Mitigation Effects M&A?
So how does ETA Risk Mitigation assessment and resulting management apply to our Entrepreneurship Through Acquisition journey? It’s not rocket science. Any potential buyer will be looking closely at the business you’re investing’s risk management process to see if they understand the risks in their business and to see if they’re prepared to handle the effects of those risks. Acquisition Entrepreneurs will want to look at the company’s risk management track record to see if they’ve prepared for and battled the risks successfully.
Put yourself in the seller’s perspective. The last thing their buyers want to do is come and purchase a business with holes in their risk management shield. If a buyer realizes they haven’t paid their workers’ compensation insurance or employee payroll taxes, they might (will?) walk away from the company. Entrepreneurs Through Acquisition haven’t spent all of their time and effort looking to acquire a business in hopes of selling it for millions only to see holes in its foundation before they actually purchase it. If you ignore parts of the business’s risk assessment, you will most likely lose significant interest in the future of the business (you will have exposed vulnerability).
So friends, now is the time to conduct ETA Risk Mitigation via an assessment of the business. Prepare yourself. Compare the company. Buy it and make millions!
Sam Palazzolo
