Business risk explained
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? |