Mark Daoust is the founder and CEO of Quiet Light Brokerage. He helps entrepreneurs, solopreneurs and boot-strappers prepare their websites, identify potential buyers and negotiate the sale of their online businesses.
Entrepreneurs are notoriously bad at seeing risk in their own businesses. In my line of work, I regularly provide free business valuations for Internet businesses. It's common to work with entrepreneurs who are blind to massive risks that could destroy their business.
This blindness has two significant impacts: first, many of these business owners only see the risk in their business after the risk shifts from possibility to reality. Next, for those who are fortunate to not have the risk realized, running a business with significant areas of risk destroys its acquisition value, causing the entrepreneur to lose flexibility.
Why Entrepreneurs Have Difficulty Seeing Risk
Since a business owner lives with the risk day in and day out, there is a tendency to grow comfortable dealing with those hazards. Additionally, entrepreneurs tend to be hopelessly optimistic, and love to focus on their accomplishments rather than failures.
To use an example, scientists predict with 99.7 percent certainty that within the next 30 years, Southern California will experience a major earthquake of 6.7 or higher. You'd expect Californians to flee the area, yet the opposite is actually true. People are staying, in fact, moving to the area. Why don't Californians flee? Because the risk of an earthquake is an ever-present reality that they've learned to live with.
Unfortunately, this behavior is all too common among business owners as well. They learn to live with the possibility of something bad happening to their business, and merely accept that fate.
In addition to growing comfortable with risk, entrepreneurs tend to be hopeless optimists. Entrepreneurs are wired in a way that makes them believe that a striking out only brings them one step closer to hitting a home run. They also forget their failures faster than non-entrepreneurs. The result of this optimism tends to be that most risks don't appear as scary to the business owner as it does to someone who may want to buy your business.
5 Areas to Look for Risk in Your Business
Single Points of Failure
A single point of failure is any element of your business that, if that element were to fail, would cause significant damage to your business. In 2011, this was a fate that befell many entrepreneurs, because in February of that year, Google released their first of many Panda algorithm updates. Thousands of online businesses immediately lost their sole source of traffic and subsequently closed.
A simple but effective strategy for any business is to always develop and nurture redundancies in key elements of your business. For example, the entrepreneurs who lost their rankings would have benefited from developing a paid search marketing campaign, building their email lists, and focusing on building strong social media followings. Losing their rankings would still have a negative impact, but it wouldn't kill their business outright.
External dependencies are any areas of your business that rely on an outside event or company in order to be successful. In 2008, my company received a number of requests to sell websites that offered free MySpace wallpapers. All of these websites were dependent on MySpace remaining relevant and successful. Of course, we know how that story turned out. Other external dependencies would include highly seasonal businesses, businesses that receive irregular large orders, or businesses dependent on earned media mentions.
If your business has an external dependency, you should focus on building revenue centers that are not dependent on that outside company or event. For example, a business that sells Halloween costumes may want to focus on selling costumes for parties, birthdays, children (kids like costumes year-round), and other holidays (for example, Valentine's Day).
Lack of Barriers to Entry
If your business lacks sufficient barriers to entry, your only protection from competition is to hope that your success remains a secret. Once other entrepreneurs discover your success, they'll replicate it, or worse yet, your company will serve as the blueprint to their business.
An acquirer recently recounted how he evaluated a horse-themed mobile app for sale in a public marketplace. Within a few months, the market was flooded with similar apps. There were no barriers to entry in that business.
Make your business unique and different by identifying areas in which you can specialize. For example, focus on building an exclusive relationship with a key vendor, or develop a software that differs from the rest of your industry. The barriers do not need to be significant; they just need to exist.
In the days of the horse and buggy, owning a buggy whip business was probably quite profitable. Thanks to the invention of the automobile, however, that industry contracted significantly. Is your business in a "buggy whip" industry?
The relevance or growth of your industry isn't all that matters; legislation can also destroy an industry. In 2014, we saw a number of e-cigarette e-commerce shops seek an exit. At the time, the FDA made aggressive moves to regulate the industry which put all of these entrepreneurs at risk.
The Studebaker company famously pivoted from manufacturing horse-drawn carriages to cars, and that allowed them to survive until the 1960s. Understand that industries change, morph, and sometimes die, so you should be prepared to pivot your company accordingly.
Key Man Risk
Key man risk occurs when there is one employee (or the owner themselves) who provides an irreplaceable skill or service. For example, blogs typically sell for significantly less than other web-based businesses since blogs revolve around writers. Podcasts would fall into the same category.
Key man risks can occur in many different ways within your business, so it is important to look at the jobs, duties, and skills required to run your business and reduce these to processes wherever possible.
Identifying risk is not a natural skill for most entrepreneurs, but rather than blindly facing risk, think through the five areas outlined above. If your business that falls into those categories, address those challenges immediately. Remember that a risk doesn't have to be real to destroy value -- it just needs to be perceived.