The Major Blind Spot Blocking Business Value

The Major Blind Spot Blocking Business Value

“…Do not think you are wiser than you really are”

(Romans 12:16)

I wrote an article last month about adapting a basic skill of counter-terrorism, Situational Awareness, to your company to increase its business value.

Scott Stewart, VP at Torchstone Global (a risk mitigation and security advisory firm) from whom I borrow this concept, defines situational awareness as “..simply paying attention to what is happening in the environment around you in an effort to identify and avoid potential threats and dangerous situations. As such, situational awareness is really more of a mindset than it is a highly refined skill.” (https://www.torchstoneglobal.com/how-to-practice-sustainable-situational-awareness/)

Business Situational Awareness means understanding the value of your business and where it stands on the key business value drivers as you assess and react to your environment. The sad fact is that many SME owners do not have this information when making their day-to-day decisions.  Often this results in them inadvertently destroying instead of building value in the long term.

Business Value – What is the worth of my company in the market and why?

This Blindspot directly affects your ability to one day capture the value of the business you built. In addition it can lead you to make wrong decisions in other areas of your life as you may become completely oblivious to the financial and often hidden risks you are facing. These risks can diminish or destroy your ability to support yourself and your family.

How would you answer the following questions in terms of your business?

1. What is your business worth today and why?
2. Are you able to capture its full value even if the unexpected happens?
3. What is the relative risk of your business in terms of your financial future?

If you feel you know the answers to these questions, on what basis are you saying your assumptions or conclusions are accurate? How confident are you in your estimates and what can you provide to support them?

Your answers to these questions, and the degree of confidence you have in those answers, is the degree of Business Situational Awareness you currently possess.

Business Value – Is my Business Increasing or Jeopardising my Financial Future

A business owner who does not know the true value ranges of his business might be taking extreme risk by having the majority of his wealth and potential retirement tied up in the largest and most illiquid asset – his business.

Whereas he understands diversification and rigorously diversifies his equity portfolio and other tangible investments, he might be in the dark as to his business and the risk it presents.

For example, as 2020 dawned many business owners were operating growing and profitable businesses around the world. Many had goals of eventually selling the business and settling down, but for now they focused on investing their time and resources into growing this profitable asset.

Some even had businesses that could have sold in 2019 and funded their retirement, but perhaps they overestimated their business value or felt they had time to put in a couple of more years and grow it even bigger.

By April they were out of business and lost everything. It took just a matter of days and weeks to destroy years of value and hard work.  Some could have avoided this fate if they had an accurate idea of their business and realised they had already too much risk tied up in the business and diversified before COVID hit.

Conquering the Blindspot

This Blindspot is minimized or eliminated by a rigorous understanding of the value of your business, optimising its value drivers, and transforming it into an independent asset that can thrive without you.

An owner who has business situational awareness can answer the questions we posed earlier:

1. What is your business worth today and why?

Our owner would know the general range of his business and differing estimates of its worth depending on who might be interested (strategic acquirer, financial investor, etc.). 

More importantly he would know why it would be valued in such a range and be able to demonstrate the factors underlying his value assumptions. He could fully support the value of what he is asking.

2. Are you able to capture its full value even if the unexpected happens?

Furthermore he would more likely be able to capture its full value because by optimising the key drivers of business value, he has built a business that can actually sell (which is true for only 5-7% of all SMEs).

Besides the ability to sell the company, this owner has built an independent business that could thrive without him.  Unlike many business owners whose business are reliant upon them, and which would fail if the owner becomes incapacitated, our owner’s business here would mostly continue operating as usual. The company has an effective management team and infrastructure in place so its future is not tied to the owner’s personal fate.

In addition, the owner would have used the business value to acquire the right scope and amount of insurance.  If the owner is incapacitated, his family and the business would both be better prepared to handle his absence than if the wrong amount or type of insurance had been purchased.

3. What is the relative risk of your business in terms of your financial future?

Finally our business owner, knowing the value of his business, its current state and the risk it represents as part of his overall portfolio, is better able to mitigate its riskiest aspects.

For example, if he is nearing potential retirement and sees that the business has become too risky by representing too large a percentage of his net worth, he is already set up to successfully divest a portion or exit completely from the business if he so wishes.

What is your Business Situational Awareness? Come check out the Sophiall Solution and take the 13 minute Value Builder questionnaire to see where you stand currently in the eight key drivers of business value.

Snapshot of 8 Drivers of Business Value.