Customer concentration, over-dependence on owner, etc.
Risk, real or perceived, tends to push the valuation down. Many of the common “challenges” in middle market businesses can really be boiled down to increased risk – risk that the historical revenue and earnings may not continue in the future. Thus, in understanding value, and how to best prepare your company, its good to understand what risk factors may exist in your company and what you can do about them.
Some of the risk factors discussed:
- Customer Concentration
- Owner dependency
- Messiness in the P&L statement, balance sheet, ownership, etc.
- Industry / Market Risk
- Supplier concentration
- Any “Stroke of the pen” risk
- Regulatory, Government contracting
- Reliance on key employee (Talent concentration)
We also discuss positive items that push valuation up, such as a high level of recurring revenue, solid contracts, etc.
Finally, we look at the risk that the business owner takes when providing a revenue or EBITDA forecast by taking a look at the representations and warrantees that are typically provided, with a few stories along the way.