When working as a financial advisor with business owners it's important to remember it's typically for the business is the primary source of wealth and income for the client. The risk profile of the business is a key driver of the value of the business today, the potential value in the future, and the stability of the owner's income.
By helping owners understand, measure, and mitigate these risks, you position yourself as a more holistic, trusted advisor.
Overall business risk is typically made up of component risks that aim to assess the likelihood of disruptions to operations or negative impacts to revenue or profitability. These component risks are aggregated to estimate overall business risk, used to estimate business value.
Businesses with lower risk tend to earn higher valuations and be more marketable to prospective buyers. Owners are often focused on growth, but growth without risk management can create blind spots that impact their valuation and income.
Advisors working with business owners help owners understand their business risk to help them protect their legacy, maximize their exit value, and ensure the reliability of their income.
Questions that help inform business risk estimates
| Risk Component | Questions |
| Owner dependency | If the owner left the business, how likely is a decline in revenue / profit? |
| Key employee dependency | If key employees left the business, how likely is a decline in revenue / profit? |
| Customer concentration | How many customers does the business have? How much revenue comes from the top 5 customers? |
| Revenue quality | What percent of revenue is recurring, renewing, or one-time? |
| Supplier diversity | What percent of revenue relies on any one vendor? |
| Financial practices | Who maintains the financial records for the business (the owner, a CPA, a bookkeeper etc.)? |
| Liquidity | What is the ratio between current assets and current liabilities? |
| Leverage | What is the ratio between debt and the value of equity in the business? |
Stay focused on the role of business risk in financial planning is the best way to avoid getting too deep into project management and business consulting with owners. It's not your job to help them execute mitigation strategies or prioritize risk reduction measures.
You’re there to help them make informed decisions that align with their wealth goals.
Introduce the concept of business risk and its impact on valuation and income.
Connect the dots between risk reduction and the owner’s personal financial goals.
Facilitate risk assessments using specialized tools or partner resources.
Integrate the findings into retirement planning, valuation estimates, liquidity strategies, and investment timelines.
💡 RISR makes it easy to estimate business risk, identify risk impacts on valuation and personal financial plans, and provide mitigation strategies to business owner clients.
There a multitude of established frameworks and tools that aggregate component risks factors into a single score or benchmark based on a questionnaire. You can either partner with valuation specialists or integrate technology platforms that automate risk scoring.
It's important to find to a questionnaire or framework that fits into your workflows easily and is very easy for your clients to interact with.
The ideal tool should:
💡 RISR makes it easy to estimate business risk, identify risk impacts on valuation and personal financial plans, and provide mitigation strategies to business owner clients.
