Most businesses do not suffer catastrophic failure because of poor management, capitalization, or bad strategies. Catastrophic failure generally results from major uncontrollable incidences that were unforeseen, and could only be viewed with hind-sight. They are known as “Black Swans,” a term coined by Nassin Nicholas Taleb in his book of the same name. They include events like 9/11 and the economic crash of 2008. They can also include fires, theft or other unique events that could not have been anticipated.
DE-RISK IN ANTICIPATION OF CATASTROPHIC EVENTS
A RiskPoint Analysis is not designed to predict events. Instead it is designed to de-risk the more common risks. This helps a business or estate prepare and be in the best position to react and recover from Black Swan events. It identifies islands of risk that could lead to significant losses should a such an event occur. Recommendations are made for the implementation of de-risking solutions to eliminate, mitigate, or transfer risk ("EMT"). This process discourages the reliance on long-term, large-scale, and harmful predictors of economic events that are usually wrong. Instead, this RiskPoint Analysis helps clients prepare by looking at their own situations,and taking vital steps to protect the value of their estates and businesses.
It is not possible to calculate how much estate or business value can be preserved as the result of a RiskPoint Analysis, in order to prepare a cost-benefit analysis. A Black Swan event can cost hundreds of thousands, if not millions of dollars in net worth value. A consistantly implemented RiskPoint Analysis can greatly reduce that loss for a fraction of its cost.
DE-RISK THE COMMON RISKS
RiskPoint Zone processes also prepare clients to position themselves against less dramatic, unanticipated events that may occur during the normal course of business, and life in general. This preparation not only reduces loss, it increases the opportunity for long-term success because alternative options have been considered in advance. Addressing these risks is the key in preparing against significant losses when the catastropic events occur.
DECREASING THE DISCOUNT RATE INCREASES ASSET VALUATION
A discount rate is a percentage used to calculate how much an investor is willing to pay for an investment in an asset or business. The greater the risk an investor is willing to assume for an investment, the less he or she is willing to pay for its acquisition. For example:
Assume there is an opportunity to buy a business that has the potential to generate net cash flow to an owner of $500,000 annually. A buyer does his due diligence and determines the risk of failure is increased because the management team is new and the market focus of the business is questionable. The buyer determines he is willing to accept the risk if he can earn 25% on his investment. The 25% is the discount rate. Based on this rate the buyer would be willing to pay $2,000,000 ($500,000/25%) for the business.
Assume, on the other hand, the business's management is experienced, and the market focus is strong. Because of this, the buyer determines he requires a 16% return on his investment. The price he is willing to pay for the business is $3,125,000 ($500,000/16%). Strong management and superior market focus reduces the investment risk and is worth $1,125,000 more to this investor.
A RiskPoint Analysis applied consistantly to an estate or business can generate much greater asset valuation over a lifetime, at a fraction of its cost.