When you think about your company’s growth, ask yourself, “What is our risk tolerance?” The answer is key to formulating your strategy. You cannot succeed with a plan for growth that pushes too far beyond the level of risk that is acceptable in your company.
If you are the sole owner, the level of risk tolerance is fairly easy to establish. If there are multiple owners, as is often the case, then answering the question is a little harder.
So, how do you discover the risk tolerance of your company?
From my experience as a consultant, I have found that while asking people directly about their risk tolerance yields some useful information, it is more valuable to look at what they actually do. We often misjudge our own relation to risk and imagine our tolerance is lower or higher than it actually is.
Here are two simple ways to discover your company’s risk tolerance:
1) Look at your balance sheet.
Is your company cash-rich and debt free? That tells you your tolerance for risk is probably very low – more common than not for privately held companies.
If there is a significant debt-to-equity ratio, you have an enterprise that is willing to exploit the benefits of leverage and assume the inevitable risks that come with debt.
2) Study your process for buying capital equipment.
If the buying process is fairly swift and is delegated to relatively few individuals, risk tolerance is probably quite high.
If the process is laborious, with complex approval procedures, risk tolerance is more likely to be low.
Knowing your risk tolerance is important because it impacts the kinds of growth tactics and financial models you will be willing to adopt. Risk tolerance will also impact the kinds of acquisition partner you will feel comfortable with.
If you have a low risk tolerance and you acquire a company comfortable with high risk, you may experience a backwash of anxiety. Conversely, if you are fairly adventurous and buy an extremely risk-averse company, you will face constant headaches trying to move your new partner into action.
*This post was adapted from David Braun’s Successful Acquisitions, available at Amazon.com