HOW TO TELL IF YOUR BUSINESS HAS OWNERSHIP RISK

Are You Willing to Gamble with Your Company’s Future?

Wikipedia defines Risk as the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). The notion implies that a choice having an influence on the outcome exists (or existed). Potential losses themselves may also be called "risks".

Entrepreneurs by nature take risks. It is an essential ingredient for success and an integral part of their personality. Yet there are areas where risk should be assumed, and others where exposure should be mitigated. It has to do with control. If a business is considering expansion or purchasing a competitor for example, this calculated risk involves research, strategy and development. A majority of the components are within control.

Compare this with events with variables you cannot manage such as a partner leaving a firm, getting a divorce, bankruptcy, or worse yet, death or disability. These situations have severe financial consequences. They can force ownership shares to get passed to other parties to whom the business did not intend. They create a void in operations, financial losses, and the need to buy back equity from entities not associated with the company. In a nutshell, these mean financial pain to surviving owners. These risks are not manageable, and are out of the executive's control.

How do you minimize this risk? Simple: Create a Buy-Sell Agreement, fund it correctly, tie it to company valuation and update it annually.

One of our clients is a mid-market company with two partners. The partners have been friends since high school and colleagues throughout most of their career. They are so close, their families vacation together. When we first started discussions with them, no business protection was in place and retained earnings were minimal. A business valuation and a buy-sell agreement had not been completed. Their company cash flow was threatened, and the financial stability of the company jeopardized. This risk also threatened their friendship. When two partners part ways and there is not a financial strategy to purchase shareholder interests, litigation is likely to occur. One owner wants the company to be worth $50Million, the other partner thinks it should be $1. Disagreement is inevitable when you have millions of dollars at stake. Significant risk was apparent and controls were implemented.

Now consider this scenario. Two partners, one alive, one not so alive. What if there isn't enough cash (retained earnings) in the hopper to purchase your departed owner's shares? If adequate funds are not available, one of two situations will occur.

1. The business will assume a new owner, likely the dead partner's spouse.
2. The new partner can force the liquidation of the business to "Buy-Out" this obligation.

What does this have to do with you and your company? EVERYTHING! Absent a protection mechanism, cash flow risk is very real, and threatens a company's ability to sustain itself and grow. Why would you leave your business health to chance?

Business Ownership Risk = Cash Flow Risk = Operational Risk

Fifth Street Financial Group helps clients mitigate this risk. We make sure you never have to feel the pain of being unprepared. We are all about the protection of your cash flow. We want your company to succeed, grow, and be prosperous.

Please don't mistake business ownership risk as deferred risk. This is an immediate concern that can threaten all the hard work it has taken to build your company. Give us a call and let us show you the steps you can take right now, to assure that your business will thrive for many years.

Do you think protecting your business is as important as we do? We welcome different opinions as long as they are constructive. Should you need to contact us, we can be reached at 888-260-8985 or service@fifthstreetfinancialgroup.com.