Risk Management

“Re-risk or de-risk”: A liberating decision-making strategy for entrepreneurs

Entrepreneurs agonize as to whether they should sell their business. They obsess over timing and value. A desire for liquidity often conflicts with a fear of uselessness if they lose the company that is their “baby.” They may feel helpless in the face of better-financed competitors. Instead of acting, they sometimes freeze – neither selling nor investing the necessary time and money in the business.

Inaction is extremely dangerous in a world of disruptive change. Stagnant businesses are quickly overwhelmed by competition. As Winston Churchill said, using an aeronautical image, “to lose momentum is not merely to stop but to fall.” To address this danger, I have developed, and progressively refined, a methodology known as “re-risk or de-risk” that provides an analytical framework for strategic decision-making and a fresh lease on life for entrepreneurs.

Against my own self-interest as an investment banker, I explain to entrepreneurs that I disagree with the binary assumption in the question as formulated. The question is not a binary “sell or continue” choice but rather “re-risk or de-risk.”

  • Re-risk requires doubling down: Investing more time and money in the business.
  • De-risk means reducing the entrepreneur’s stake in the business.

In this context, re-risk can be effectuated in a variety of ways, such as improving operations, hiring new management, fixing the balance sheet or buying another company. These actions should not be viewed in isolation but rather as strategic decisions in the context of re-risking. Instead of a binary choice, the re-risk alternative provides a multitude of options.

Similarly, the de-risk alternative provides various options. The entrepreneur doesn’t have to sell the company in toto to de-risk. Especially in today’s market, there are many ways to take money off the table while retaining an equity position. Strategic buyers, private equity and family offices are flush with cash and are amenable to creative de-risk solutions.

The “re-risk or de-risk” methodology is applicable to other situations as well – for example, a purchase of another company, response to competition, capital expenditures, expansion into new markets or investments in new processes. In effect, all critical business decisions and challenges can, and should, be subjected to a “re-risk or de-risk” analysis. In the absence of such a methodology, decisions are taken, or avoided, on an ad hoc basis.

Entrepreneurs are known for taking risks. They succeed by achieving what is thought to be impossible. But sometimes entrepreneurs stop taking risks. They freeze – they struggle to take necessary action because they think that they are facing a brick wall, severely limited choices or no way forward. Entrepreneurs can unfreeze by reformulating the dilemmas overwhelming them into a decision whether to re-risk or de-risk. The entrepreneur recovers the ability to act because a variety of options is revealed, removing the brick wall of an unattractive binary choice.

Furthermore, by utilizing this analysis, entrepreneurs integrate their personal and business decision making in a strategically coherent and effective manner.

The inherently iterative nature of the “re-risk or de-risk” method is a powerful and attractive feature. This is not a one-time decision. The “re-risk or de-risk” analysis is a way to repeatedly adjust risk levels. Entrepreneurs may increase, decrease and again increase risk, or vice versa, as circumstances and goals change. The availability of capital in the market supports this optionality, provided entrepreneurs control their destiny by utilizing the “re-risk or de-risk” methodology.

A frozen entrepreneur can use this analysis to recover the ability to act. However, the wise entrepreneur deploys this analysis on an ab initio and consistent basis, thereby increasing the likelihood of sustained success.

The goals and personal needs of entrepreneurs change but, especially in today’s competitive world, a company risks decline and failure if it stagnates. Momentum must be maintained. Like quarterbacks in football, entrepreneurs cannot stand still – if they do not pass or run with the ball, they will be sacked.

The good news for entrepreneurs is that they can retain or regain their ability to act because choices do not have to be binary or final. The solution is both bold and nuanced. The iterative quality of the “re-risk or de-risk” methodology provides continued optionality for entrepreneurs. By employing this methodology, entrepreneurs can maintain momentum while strategically integrating personal and business decision-making.

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Category : Risk Management

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About the Author: Sheon Karol

Sheon Karol, a nationally prominent investment banker, is a managing director at Hilco Corporate Finance. Winner of the “Boutique Investment Banker of the Year” Atlas Award (2018), Karol leads processes for U.S. and international companie

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