I was recently exposed to an interesting study called Roads to Resilience, which is a 2014 report by the UK’s Cranfield School of Management on behalf of the UK insurance and risk consultancy, Airmic. The basic thesis is that opportunity is the upside of risk, and that seizing risk-driven opportunities requires a decisive and rapid response, which in turn requires empowered teams, practiced processes and flexible resources.
There are four components of a rapid and decisive response:
- Decisive and appropriate actions: It is necessary to act before the issue becomes a problem.
- Identified teams and processes: In order for a response to be both rapid and decisive it must be well thought out and managed by skilled employees with the appropriate level of authority to implement change quickly.
- Empowered responses: Through empowered employees issues can be nipped in the bud, which can only happen in a flexible business enterprise.
- Rehearsed action plans: By running scenarios and practicing responses damage can be minimized, and opportunities can be exploited.
It can be readily seen that to be Rapid Response Ready (R3, which is my spin), substantial thought must go into the people and culture, leadership, structure and strategies of an organization. Well, you’re likely thinking, just how does this apply to my small or medium-sized business? Well, that’s a good question; and that’s all I’m really interested in, introducing the question.
As business appraisers we regularly scrutinize the operations of businesses of all sizes and shapes across numerous industries. While we look at many factors, some of the more important things we are interested in include:
- Depth of management;
- key person dependency;
- the existence of budgets;
- the existence of achievable forecasts;
- the quality of earnings;
- the quality of assets; and
- the ability of the enterprise to withstand internal and external shocks.
All too often, when we ask about these things we are met with a blank stare. Then, when we debrief with the client and tell them that the business they have owned for twenty-five years is simply not worth as much as they would like to believe we are met with yet another blank stare. We would truly like for everyone’s business to be worth a lot of money; however, we recognize that turnkey operations are worth more, and sometimes substantially more, than those that need a lot of work.
Obviously, all of this is slightly hyperbolized in the interest of making what is a stressful situation more palatable. The truth of the matter is that if you have never done a budget, have no idea where your business is going, pay yourself out every last dollar of earnings, and have deferred capital expenditures and inadequate working capital, your business is not equipped to withstand shocks.
Now think about the perception of a third party that might be interested in buying your business. Is everything as it should be? What needs to be done to address the risk that things are not as they should be? How much time and energy have to be expended to make things right? I think you get the picture.
In line with the findings of the Cranfield study, it is in your best interest to pay attention to four key things in your business:
- Develop strong risk radar: Be constantly vigilant as to risks (and opportunities in disguise), and work through how you will handle them in advance.
- Pay attention to your resources and assets: Strive to maintain flexibility in your balance sheet and in your organization; maintain your income-producing assets.
- Have in place strong internal and external networks: Empower your team so that risks and opportunities can be addressed rapidly and effectively. Seek to avoid over-reliance on any single person or organization, internal or external.
- Review and adapt: Periodically look at where you have been, where you are going, and how you will get there. Make continual adjustments to your contingency plans.
In the language of the sea, one that flies by the seat of his pants is called “salty.” There is a nautical expression that says, “there is such a thing as a young salty sailor, but there is no such thing as an old salty sailor.” A vessel that is well found and well commanded will drive through a strong sea. Clearly, there is an alternative to that proposition.