Preparing The Business Plan – Risk Analysis

While the underlying assumptions regarding the development and competitiveness of the company’s products and services, as well as the company’s financial projections, should always be tested during the initial analysis in those areas, some form of overall risk analysis can be a valuable final step in the planning process.  Perhaps driven by regulatory concerns and the propensity for investor’s to litigate with founders and managers if things do not go well, the practice in the United States is to include extensive “risk factors,” sometimes referred to as just “certain factors,” in investor disclosure documents.  While drafters have tended to create what are essentially “boilerplate” explanations of events and trends that might create problems for the company in the future, it is important to separately consider all the key risk factors that might be relevant to the company and its ability to attain its business objectives.  Some of the questions that need to be asked include the following:

  • How will the company’s inability to raise all the required capital impact its product development plans?
  • What might be the consequences if the company is not able to complete development of its proposed products on a timely basis?
  • Are there other parties that might have a legitimate proprietary interest in a material element of the company’s technology?
  • What might be the consequences of the company’s inability to reach acceptable agreements with potential manufacturers or distributors for the company’s products?
  • What is the possibility of new or modified regulatory requirements that might apply to the company’s products?
  • What might be consequences of the departure or unavailability of one or more of the members of the founding group?

Obviously, this is not a comprehensive list and reference should be made to public disclosure documents of other companies involved in similar business activities.  While anticipating a risk does not always prevent the adverse event from occurring, it does allow the founders to take some precautions.  Moreover, this is an area of great interest for potential investors, who will almost certainly require responses during their due diligence investigation.

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