Identifying and Responding to Business Risks
One of the more challenging components of a business plan is creating the section focused on risk factors. This segment generates the most questions from plan authors, creates more uncertainty, and is the one that tends to get ignored or forgotten about altogether. We can assure you that it is of monumental importance, and here is why.
In many respects, the Risk section is a test. Most savvy investors reading your business plan have thought of a majority of the risks by the time they have finished reading what the opportunity is, and how your product or service solution addresses it. However, they may not have considered or uncovered all of the embedded risks. Therefore, this is your opportunity to demonstrate that you have properly vetted your business and that you are the ultimate authority in driving its success.
Potential investors want to know that you have studied all aspects of your venture, as well as the competitive threats and operational challenges that may arise. More importantly, they want to know how you plan to address these risks should they materialize. For these reasons, we say this portion of the plan is more of a test than an exchange of information.
Similar to other sections of a business plan, no single segment will get the concept funded, but it could get it rejected. It is essential for an investor to know that the business owner has thought about all the relevant angles. Your ability to properly identify the pertinent risks actually provides some comfort while simultaneously answering the question of whether you are the right person to be managing the company. Accordingly, and in a roundabout fashion, one could argue that your ability to recognize the individual risks and address them actually DECREASES your aggregate risk score in the mind of an investor.
In the grand scheme this is noteworthy because, as discussed in our narrative Just What Are Investors Looking For Anyway?, investors require some clarity with respect to their potential return on investment (ROI). This is then balanced against the perceived level of risk to arrive at an expected risk-reward trade-off. The higher the expected ROI and the lower the supposed level of risk, the better the chance a business secures funding.
Identifying Relevant Risks
While it can be challenging to write the narrative surrounding the Risk Factors section, life is made easier by the fact that you have access to a war chest of examples. And the irony here is it comes with compliments from the Federal Government.
The best examples we have seen in identifying risks and expressing them in clear, concise prose come from the annual reports that public companies are required to file with the Securities and Exchange Commission (SEC). These filings (known as 10-Ks) can be found on the following website: (http://www.sec.gov/edgar/searchedgar/companysearch.html).
Look up any publicly-traded company’s annual report and you will discover a fairly extensive section dedicated to the multitude of risks the organization faces (note: these are often titled “Risks” or “Risk Factors” in the table of contents). As a means of kick starting your effort, we recommend that you look at the risk sections of those companies that are comparable to yours.
From the SEC site, you can readily see how risk statements are presented. While perusing them, you are likely to identify some risks that directly impact your organization. Largely for disclosure and compliance purposes, the volume of risk statements in public documents tends to be exhaustive. What you may find is that a number of the risks are self-evident, such as:
- “If we do not sell any products, we will go bankrupt.”
- “If we are unable to get any customers, we will not generate any revenue.”
We do not advocate stating every single risk your company may face, nor do we recommend creating lists that are anywhere as extensive. What you are trying to identify are those unique obstacles that are of vital importance to your organization, but may not be readily apparent to the reader/investor. An easy first step is to run through each section of your business plan and write down the risks that apply to each. Most of the risks that you identify will likely come from areas where you have direct control, but it is also important to recognize competitor actions that may alter your business model in some regard.
Responding to Risks
While investors will appreciate that you have thought about the potential risks that may impact your business, they really want to know how you intend to respond or why you believe a particular element might not be that foreboding. This is where the universal knowledge you possess can shine. You have the opportunity to create actionable responses that mitigate the perceived risks and demonstrate how and why your product/service solutions will not materially impact operational and financial outcomes.
Putting It Together
Writing effective risk statements and the associated responses takes practice. However, it is an invaluable opportunity to contemplate all aspects of your vision: sales, distribution, operations, competitive landscape, etc. What you may find is the “if-then” game that ensues is a valuable component of vetting your concept and its various nuances.
That process, in turn, should be reflected in two important ways:
- your ability to create a more comprehensive and established business plan; and
- improved execution once your blueprint becomes reality.
Finally, as your business develops you may find that new risks emerge that require deliberation, just as others may vanish. As mentioned in our narrative, A Plan that Works and Evolves With You, you will want to document these evolving risks in your business plan and be able to address them effectively.