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A resilient business has the strategic capacity to do well in good times and bad — and the more resilient a business is, the more valuable it becomes.
“Business value is calculated based on how confident a buyer is that the business is going to be able to generate revenue, cash flow, profit, and growth in the future,” said George Sandmann, founder and CEO of Growth Drive LLC. “That confidence is elevated when a business has done the things that it takes to be a resilient business.
“A business with high strategic capacity may be able to more quickly borrow money or take advantage of an opportunity. It has a lot of different options that a business with lower strategic capacity does not,” he continued.
Successful businesses have found that the ability to thrive under change makes resilience a strategic advantage. Building resilience requires looking beyond business interruptions and shifting to an opportunistic mindset.
Knowing the valuation of the businesses is also critical, especially for making well-informed decisions that impact business value as economic and market conditions shift. (Business valuation calculator)
A resilient business will better navigate through changes, Sandmann pointed out.
“You never know what’s going to come at the business from a competitive perspective, a market perspective and an internal perspective,” he said. “Having a resilient business helps you weather those uncertain and trying times.”
Diversification leads to resiliency
Resilience starts with the senior leadership team.
“We need a business to be immortal,” Sandmann said. “It can’t be overly dependent on the senior leader and needs to mitigate risk, like through a succession plan.”
Minimizing dependence on the owner can help increase business value in addition to improving resilience.
“For a business to have a high value, we have to be able to pull the founder out and have the business not only survive but thrive,” he suggested. “It should be bigger, faster, and stronger when they’re gone.”
Delegating responsibility across the senior leadership team decreases dependence on any one individual.
“There should be collaborative accountability so that the business can be resilient to the loss of one or more of its senior leaders,” Sandmann said.
Other risks that could threaten a business’s resiliency is having a large portion of a company’s revenue coming from a single client or even coming from a single salesperson. Similarly, being dependent on a sole supplier or vendor is also risky because they often face the same economic challenges as the business.
“Whenever a business depends on a single person, customer, or entity for its growth and success, the resulting risk may adversely impact the business’s value and transferability,” said Brian Trzcinski, director of business market development with MassMutual. “Having multiple sticky client relationships and suppliers you can depend on will soften the impact of losing one if they succumb to harsh economic conditions.”
Like any business, a resilient business faces internal and external challenges, but its high strategic capacity enables it to overcome adversity and grow business value.
Know your margins to overcoming challenges
Business owners worry about economic conditions. MassMutual research shows that 9 out of 10 business owners now worry about inflation.1 They are also concerned about the business impacts of rising interest rates (80 percent), the looming possibility of a recession (80 percent), and stability in the banking system (67 percent). (Related: Tips to recession-proof your business)
As daunting as such challenges may be, resilient businesses with wide margins are prepared.
“If we have created a business that’s generating margins at or above the industry norm, then we can cut costs and prices while maintaining recurring revenue from our existing customer base. We have strategic capacity,” Sandmann said.
A resilient business may also be able to borrow money when competitors cannot, to increase working capital, expand operations, or grow sales.
“Debt is a powerful business tool,” Sandmann pointed out.
Even inflation is less challenging when a business is resilient.
“Having higher margins allows me to create programs designed to blunt inflation. As borrowing rates rise and the costs of supplies have gone up, I can work with lenders and suppliers because I will have good relationships with them in advance of asking for assistance,” Sandmann said.
Ultimately, a resilient business is more valuable because it comes through trying times stronger.
“Creating high strategic capacity ensures that the business will generate value at the top range of multiples for a sale, and it will be able to successfully complete a merger or acquisition transaction,” Sandmann said. “Having excellent internal processes, the people needed to execute those processes, and generating revenue at margins at or above the industry norm will create confidence in a buyer.”
“There is $2 trillion in capital sitting as dry powder in private equity coffers, and it will be deployed into businesses with high strategic capacity,” he concluded.
That would be the reward for building a resilient business that does well in good times and bad.
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