A common reply is “my business (or industry) isn’t like that”, but there are many risks, some known, some unknown and those tricky unknown unknowns. It is important to identify risk, manage and if appropriate, transfer the risk.
Supply and Demand
Every asset is subject to supply and demand. When there are fewer buyers than sellers the price is likely to become lower. When there is very little demand, the price is likely to fall dramatically. Valuations that were once valid and reasonable can even become zero.
Think it can’t happen? Many vets and doctors in the 70s and 80s bought equity into practices to become partners. A very high demand for doctors (and tight supply) means that there is less or no benefit to buy in to a practice. As a result, within a fairly short time frame, these previous ‘assets’ have little or no value.
Changing technology also can have a huge impact. How much is a bookstore worth? Want to buy a music shop? What about a video or DVD shop. Used a milkman lately? The point is that it is very difficult to know what is around the corner that may have a drastic impact. Working from home or using serviced offices is now possible for many through cheap technology. You can video conference with SKYPE for free or use your mobile to log in to the office server. Could this have an impact on valuations of ‘traditional’ offices? Possibly, but also offers opportunity for a different type of office environment.
Even professional service industries can be subject to change. Overseas professionals can bid for your work or quote their hourly rate. It doesn’t matter if it is in Boston, Bangkok or Bangalore. If it can be emailed, it can be outsourced. Bookkeeping, Architecture, Graphic Design, Web etc are all subject to these very new business risks.
The government can ‘change the goalposts’, change legislation and not least, markets can change and many highly profitable businesses have become bankrupt.
So the biggest risk is actually ignoring any these possibilities and relying on the possible sale of a business sometime in the future,( hopefully to coincide with your retirement) to provide 100% of your retirement income and lifestyle for the next 30 years.
Sorry, that isn’t a plan – it is a wish.
Are there other options? Yes – although it is important to grow your business it is vital to manage the risks by diversifying and investing in other growth assets. Both inside super or outside super have advantages and disadvantages. You may use your super fund to help the business grow by buying your own premises
If you would like to discuss these issues or how to reduce some of these risks please call the office to schedule an appointment.
Brett Dillon CFP