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Start With the Low Hanging Fruit

You can grow enterprise value by starting with the easy stuff



There are two primary pushbacks I get from owners on beginning the work of growing business value: “I don’t have the time” and “It will cost too much money”. It is true that this work takes time and often also takes an investment of resources. If you sort out the range of activities, though, some of them are not costly. 


And often they are neither costly nor time-consuming. We call this the low hanging fruit. 




Even if there is an appetite to embark on a long-term, strategic growth plan, making quick, low-cost improvements to the business could help build momentum. Success begets success. It just makes sense to start with the low hanging fruit. 


What types of actions fall into “low hanging fruit”?




The theme of the category is de-risking. De-risking activities span a number of aspects of the business and also touch some aspects of the business owner’s personal planning. 

It’s important to focus on risk mitigation first because it sets a foundation for everything that comes later. 


Protecting the value you have already created is meaningful regardless of what comes next.


Maybe you stop there and pursue no other growth strategies due to the time and money concerns. Or you may embark upon an intentional, long-term, value acceleration path.


Either way, you start by protecting what you have. Individual de-risking needs will vary from business to business but there are some examples that we see over and over again.




Businesses that have more than one owner usually need to focus on having a buy-sell agreement in place. The businesses that actually have one often haven’t dusted it off in some time. This needs to be done and the cost of having an attorney review, revise, and/or draft a new agreement is minimal when compared to the financial catastrophe that can result from not giving this some attention. 




The purpose of the buy-sell agreement is to have a defined and orderly sale to surviving partners in the event of one of the partner’s disability, death, or other incapacities.


Common problems include partners buying life insurance to fund the buy-sell agreement and not actually having an agreement. I have personally seen the fallout from this mistake. 




One example involved a partner's premature death. The partners had purchased sufficient life insurance on one another to buy out each other’s spouse in the event of premature death. The problem was that no formal buy-sell agreement had been drafted and executed. So the surviving partner decided that he didn’t want to buy out his deceased partner’s wife with the proceeds. He hired an attorney and negotiated the buyout price way below what the partners would have agreed to in a formal buy-sell agreement. The deceased partner’s wife got short-changed and left with less money than her husband and intended. This could have been avoided and without much cost.


Another typical problem with buy-sell agreements is not revisiting them from time to time. Hopefully, the business value is going up over time. Some businesses go down in value but very few remain constant throughout time. The buy-sell agreement should reflect the current realities of the business and there should be adequate funding to carry it out (usually life insurance) in the event it is necessary. Having a properly drafted and funded buy-sell agreement that is up to date and current de-risks a business and doesn’t need to be costly or time-consuming. As I mentioned in my example, it also can de-risk the personal lives of the owners themselves.




In closely held family businesses, the business and the personal tend to overlap quite a bit. Take estate planning. Having a plan for what happens in the event that you die or are incapacitated is an intensely personal exercise. Family tragedies, death, disability, divorce, health issues, custody of minor children, and accidents are the unpleasant types of things that need to be contemplated in estate planning. They are of fundamental importance to an owner’s family which is why they must be confronted with detailed plans. A complete, thorough estate plan also helps reduce risk in a business which may not be as obvious. Failures in the personal estate planning of the owner absolutely put the business at risk in the event that something were to happen.




The owner’s personal and financial planning, if done well, can also reduce business risk. This may not be intuitive at first. It makes sense that an owner who has taken the time to craft a personal and financial plan has reduced risks to the owner’s family and finances. But the business? Buyers of businesses tend to be wary of sellers who have not done this type of planning. The transaction is far less likely to close when the planning has not been done. How a potential buyer may see the business may not be of primary concern to every owner but personal and financial planning still reduces risk for a business. There is preparation for what comes next which leads to better business decisions based on the owner’s objectives. It is not costly to do a personal and financial plan with a professional that understands how to translate the plan into business objectives.




Other personal topics that business owners could consider targeting with actions to reduce risk include insurance coverage. It doesn’t cost a lot to assess one’s coverages and verify their adequacy. There are a number of other personal areas not covered in detail such as diversification, personal debt, and long-term care coverage. None of these areas need to cost a lot of money to address. They don’t typically involve investments in hiring people, buying equipment, or improving facilities. They reduce risk and serve to protect some of the work you have already built.




Stuff you didn’t plan for is going to happen.


Turning to the activities that mostly focus on the business itself.


We need to have contingency plans for what we will do when that stuff happens. Activities that reduce risk in the business tend to be less costly in time and money. They don’t usually involve hiring more people, buying more equipment, or building more facilities. Those types of investments are made with the purpose of growing the enterprise value of the company. They are best addressed after the business has been appropriately de-risked. Let’s go through some of the activities that a business can take to reduce its risk.




Business Interruption. It’s a good thing that this never happens! Granted, the insurance coverage relating to COVID interruption is complicated. There can be a business interruption for many causes other than communicable diseases though. Lightning can strike. Literally. Other natural disasters can cause physical damage that requires the business to close. Business interruption insurance can cover operating expenses, a move to a temporary location if necessary, payroll, taxes, and loan payments. Dealing with business interruption risk is about more than insurance. It involves having detailed contingency plans for what would happen in the event that the business gets interrupted.



Key People. Are there people in your business that would be difficult to replace? It’s never pleasant to think about premature death or disability but as the business owner, you must. Your team is your extended family. So much so that many businesses cannot continue to thrive if a key team member was lost. Buying insurance to compensate the business for the time and expense it would cost to replace that key member tangibly reduces risk. It’s also really not that expensive. There are ways to include it in the long term compensation package of the key person. This can tie the key person into the business more closely and effectively reduce two risks!



Data and Information Security. The more personal information a business has about its customers, the more focus there should be on reducing this risk. Cyberattacks of smaller companies can be very costly. No business can afford to neglect training and fostering a culture of cybersecurity. At one time, this was only a concern in the domain of very large companies but no more. All employees must be aware of the risks and company policies on cybersecurity. A cybersecurity framework needs to be implemented and an incident response plan needs to be documented. This may involve some investment but the risk is so asymmetric that it should be addressed.




Company Records. Are the company’s records in good order and easily accessible? We are talking about accounting records that document the business’ transactions. Bank records that record all of the company’s banking relationships. Legal documents, permits, and licenses that pertain to the business should be at hand. Insurance coverages should all be organized and monitored. Insurance companies are very good at denying claims. Know what your coverages are and make sure that everything is kept up to date. None of this is costly and it’s not really time-consuming once you have a system that you can follow.



Business Plan. I can hear the groans from here! But I’m not talking about the type of plan that no one ever reads. Don’t dust that off. We’re talking about a documented business plan for the next three to five years. It should be comprehensive, believable with specific and measurable objectives. The necessary action steps with implementation costs and investments should be included. Contingency planning can be included which is a great way to reduce business risk.



Vendor Concentration. How dependent is your company on any single vendor or group of vendors? If the company’s raw materials and other inputs are coming from one vendor or group of vendors, there is too much concentration. Vendor concentration is a business risk. Look for ways to diversify the sources of raw materials and other inputs. Multiple sources mean competitive prices but it also means that if there is an interruption on the vendor side, you have alternatives. This takes a bit of time but is not costly and it is meaningful de-risking.



Other Risk Reduction Categories. There are, of course, many other areas of de-risking that could be considered. Some do have significant potential costs such as environmental and safety issues, customer concentration issues, and employee relations issues. The point isn’t to address everything at one time. No business can realistically focus on more than 3–5 initiatives at one time. Knock out the low-hanging fruit. Get some momentum. And keep moving forward.

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©2020 by Brent Rupnow, CEPA, CFP, CLU, ChFC