Assets of a business are classified as being either tangible, such as fixed assets and receivables, or intangible such as patents and goodwill. When business performance falls off, it is the value of the goodwill that disappears first.
Business risk should be identified to the extent possible, mitigated to the extent reasonable, usually leaving the business to carry the residual risk which it deems is manageable.
Don't put temptation in front of your employees. Ensure you have instituted a through system of internal controls to prevent a breakdown in the financial and operating integrity of the business. Your accountant will be well versed in what is required.
Tangible asset insurance
Obviously a current insurance programme is required by most businesses. The secret is to keep it current and fresh and constantly challenge the premiums being paid.
Exporters can adopt programmes to protect the collection of foreign trade receivables.
Business Interruption insurance
Fixed asset insurance programmes are adopted by most businesses. The building burns down and the assets are replaced – eventually. However what happens to cash flow in the meantime? Fixed expenses continue but sales have stopped. Your key employees are kept on the payroll for fear of losing them to the competition. When it's time to restart the business your working capital reserves are exhausted. That's why you need BI insurance, to protect the operating cash flow and the business when physical assets are destroyed.
Key Man insurance
Not as well known is insurance that can be taken over the life of the owner or a key shareholder. Generally the policy is owned by the company. The proceeds on (say) death are paid to the company to buy out the shareholder. It creates liquidity for the shares.
The cost to build and retain a workforce can be significant. In strong labour markets employee turnover can become problematic. Lock in your key employees with management contracts, including, where appropriate, confidentiality agreements and restraints of trade should they leave. Value tip: When you buy a business ensure the seller is prohibited from restarting a competitive business through the inclusion of non-solicit and non-compete clauses in the sale and purchase agreement.
Ensure the appropriate registrations are in place to protect the various forms of intellectual property you own such as a trade name, trademark or a patent.
Ensure these are well documented and the various controls are well identified.
Health and safety
Government regulations require companies to meet certain standards to protect employee welfare.
If you do not remit your PAYE withholdings, GST and corporate taxes to the government in full and on time, it can become an expensive proposition.
Most business spread the risk of the loss of a customer, supplier or employee. If at all possible do not become dependent on any one large customer, supplier or key employee. Such dependencies increase business risk with a direct negative impact on value
Knowing what needs to be done to maximise value when the time is right to exit the business is critical to a successful and rewarding exit. To maximise proceeds target most likely buyers and position the business accordingly. Ideally an exit should be planned before you start or buy a business. Value tip: Businesses are much easier to buy to than to sell.
Back to Business Value Considerations