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What is Your Diversity Risk?

Recently, in a group of CPAs, one told a story of a client that had received devastating news:  They had just lost their one and only customer!  How do you recover from that?  You probably don’t.  They were going to shut down, and default on an SBA loan. The CPA was losing a client as well. 

I’m sure we are all familiar with the old saying, don’t put all your eggs in one basket.  That also applies to businesses in several ways.  It applies to customers, it applies to suppliers, and it applies to employees.  What if your sole supplier goes out of business, or decides to enter into an exclusive agreement with your competitor?  What if your most trustworthy employee suddenly dies, or worse yet, decides to start a business to compete against you?  What if he’s the only one who knows how to do his job?

 

Most owners are aware of too much customer or employee reliance but may not have given much thought to suppliers or sales platforms. If you want to build a profitable, valuable business, you need to make sure you are diversified.  During a business valuation, the appraiser will look at these issues.  A savvy acquirer or investor will look at them as well.

 

•    What percentage of your revenue comes from your largest customer?
•    What would happen if you lost their business?
•    Do you have alternative suppliers for all your parts and materials?
•    Are there any employees who you are overly reliant on?
•    What is the depth of management?
•    Are you too reliant on one sales platform?

 

If there are problems with too much risk in one place, this will affect the value of your company.  But even more important is the risk that you are exposing yourself to as the business owner.

 

I do not know if the CPA above had advised the client on this issue. Maybe he or she had advised the client about the danger of this.  It’s also possible the CPA didn’t even know about it. Some business owners only want compliance.  They just want their tax return done, or their books done. They don’t see the return on investment and wouldn’t even know where to begin.

 

This diversity and depth of management issue is one of the Eight Key Drivers of Company Value, called the “Switzerland Structure”.  Make sure that you aren’t exposing yourself or your company to unnecessary risk.  You can learn more about the Switzerland Structure here:   Switzerland Structure Video

To learn more about the Eight Key Drivers of Company Value, get your free e-book here:

The Eight Key Drivers of Company Value

 

Basket of eggs - photo by Klaus Nielsen