Risk & reward. Thabani Zulu
What if I get the wrong partners?
What if the structure of my business is wrong?
Finance
What if I cannot raise capital for my business?
What if the finance I get is too expensive for the business?
What if I do not make a profit?
What if my costs go up?
Competition
What if my business is wiped out by competitors?
What if the market prefers to buy from the competition?
Employees
What if I employ the wrong people for my business?
What if the employees go on strike?
What if the employees become redundant and costly?
Suppliers
What if the suppliers go out of business?
What if the suppliers take long to deliver?
What if the suppliers are expensive?
What if the suppliers deliver poor quality?
Taxes
What if I get on the wrong side of the law?
What if I fail to pay or declare my taxes?
The following diagram gives an indication of the risks to which a typical business is exposed in its life cycle:
| INCEPTION ➞ | OPERATION ➞ | DISPOSAL |
| Sector Valuation Finance Security Competition | Cash flow Losses Transport Suppliers Market Human resources Environment Taxes Legal | Valuation Economy Buyer availability |
I think we need to ponder on each one of these risks. You will see from the above diagram that there are just so many factors that can cause a business to collapse. Many are still missing, I am sure, but I have tried to capture those risks I would consider significant. Each risk may be so significant that it exerts strain on the business throughout its life. For instance, if you enter into an inappropriate finance contract, it can cause stressed cash flows and sustained losses, and, even on disposal, affect the valuation of the business so negatively that the buyers pick it up for next to nothing.
I had a business that was badly financed and structured. Every day was a battle, and every cent that I made seemed to be swallowed up by finance costs. The infrastructure was bigger than the operation. There was no way of getting out because of the unfavourable contracts I had entered into. Cash flows were severely strained and the business was eventually liquidated by the financiers, where it was sold under the hammer for a pittance. As I write this book, I am still recovering from the aftermath of my bad risk management! You would be wise to learn from the voice of experience and not let it happen to you.
Business risks in detail
I want us to look into these risks in greater detail. I am hoping that you will be able to identify where your business is and therefore which risks you should be managing.
RISK
INCEPTION
| Sector | ● The sector is not vibrant and sustainably profitable ● The sector is heavily legislated ● The business is not duly registered |
| Valuation | ● The business is overvalued ● The underlying value is not substantiated and cannot be realised ● You have inadequate capacity to unlock the value you will pay for |
| Finance | ● You do not have finance for the venture ● You may overcapitalise your business ● A financial institution studies your business plan and declines ● The business plan is of an inferior standard |
| Security | ● You do not have security for the finance ● Offering security exposes you and your family to more risks |
| Competition | ● Competitors are fierce and unforgiving ● There is just too much competition ● You do not have a competitive edge |
OPERATION
| Cash flow | ● Not enough cash to discharge obligations ● Not enough cash to buy needed material ● Bad credit rating due to non-payment |
| Losses | ● Break-ins ● Shrinkages |
| Transport | ● Inadequate ● Not in a working condition ● High maintenance costs |
| Suppliers | ● Insufficient, with heavy reliance on a few ● Expensive ● Delivery lead times not adequate ● Deliver poor quality |
| Market | ● Too small ● Very fussy and makes many returns ● Unfavourable economic conditions, therefore poor payment ● Delays in payment affecting cash flows ● Aggressive and more tactical opposition |
| Human resources | ● Non-availability of necessary skills ● Labour unrest ● Loss of necessary workforce ● Lack of productivity |
| Environment | ● Product potentially harmful to the environment ● Environmental impact assessments not conducted on time |
| Taxes | ● Late payments attracting interest and penalties ● Inadequate skills regarding tax issues and filing of returns |
| Legal | ● Non-compliance with legislation ● Litigation by suppliers, employees and clients |
DISPOSAL
| Valuation | ● Value of the business is too low ● Cannot find a business valuer at an affordable price |
| Economy | ● Value is too low due to prevailing economic climate ● Non-affordability due to economic climate |
| Buyer availability | ● Non-availability of serious buyers who can afford the price ● Inadequate purchase and sale contract |
Managing the risks
Since you now know what risks your business faces, you are in a much better position to manage them. Remember that the process of identifying risks is an ongoing one and that the dynamics of your business will keep changing from time to time, exposing you to new risks. Do not regard this as a static process that unfolds only once in the