News & Resources

Managing risk can protect business valuation

Mar 14, 2011 Karen Umpierre

Running a company can be risky business, with internal and external factors constantly threatening an entrepreneur's success. As accountant John Alfonsi told Smart Business magazine, the way owners manage these risks can also affect their business' valuation. The most common way to value a business is by projecting its future cash flows and calculating the current value of those cash flows, Alfonsi said. The risk involved in those projections is that a company will not hit its cash flow target, so it is important for owners to have solid information on which to base the predictions. While businesses cannot control external risks such as an economic downturn, analyzing the risks specific to that company - such as the loss of a key customer - can help them prepare for and survive a bad situation. By identifying potential risks, an entrepreneur or business valuation analyst can estimate a company's likelihood of success, potentially leading to higher valuation estimates, Alfonsi said. If a business owner chooses to sell his or her business, they should identify the "key value drivers" that give a company its worth, Forbes magazine blogger Jose Freyre recommends. Finding these will help entrepreneurs target what improvements they have to make before selling and make the value of their businesses stronger.