Derisking would be the method of removing threat components from your enterprise in an effort to make it additional eye-catching to an outdoors investor or to an outside buyer. It’s among the most significant variables in the grooming approach as a way to be an desirable corporation to invest in i.e. “Investor Ready”.
There are dozens of areas and hundreds of ways in which a business may be exposed without knowing it. In the normal course of business an owner may not worry about these factors, as they are within the “comfort zone” of operation. For an external party to get involved however, they need a much more transparent organisation so they are not confronted at a later date with skeletons in the closet.
It is important because businesses already face uncertainty. And while a venture capital investor may have a reasonable tolerance for risk, they will not welcome unnecessary risk. The goal is to control as many areas of risk as possible, so at least the risks are known. Most companies who have had an internal focus (i.e. have focused on sales, marketing and operations in order to grow) have not thought about all the areas in which they are vulnerable.
The process of derisking limits the areas of exposure, and therefore decreases exposure to uncertainty. It also increases the chance of success through improvements in clarity in almost all areas of the business.
Derisking falls into two areas – one is simply clarification (i.e. creating a contract where an informal arrangement was in place) and the other a change of substance i.e. changing a supplier because it lowers risks.
Some examples include:
Formalising employee agreements. This may mean creating contracts for employees that have previously operated without one, or strengthening existing contracts. Particular issues would be with protection of IP, ownership of IP, confidentiality and restraint of trade after employees leave.
- Creating / clarifying written agreements with suppliers
- Creating/ clarifying agreements with customers
- Moving “ad hoc” sales to contracted revenue where possible
- Formalising and documenting internal processes
- Protection of IP – patents, designs, copyright and so on.
- Protection of data by limiting and monitoring access to key systems (CRM, accounts etc)
- Key employee insurance (including of the owners) in the event of death.
Creating or clarifying credit terms and policies. Getting credit offered back within trading terms, and ensuring that all credit offered is documented with the correct application forms and personal guarantees.
Removing reliance on key personnel, in particular vulnerability to information or relationships which may be lost on their departure. This may mean adding additional points of contact to key client accounts so individual relationships are less critical.
- Documenting key processes – getting the knowledge out of people’s heads
- Ensuring insurances of assets are up to date, and sufficient.
- Lowering legal exposure (liability). Ensuring insurances are held that cover product liabilities and so on.
- Ensuring compliance with all ATO and ASIC regulations. Creating systems for their ongoing compliance.
As you can see, this is …Read more