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Financial & Marketing Consultant, Author
"Business Plan Secrets Revealed!”
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How to Handle Risk Factors In
Your Business Plan
Eventually every investor will ask you questions designed
to flush out the amount of risk your business poses. One way
to help take the bite out of this negative questioning and
boost your credibility is to cover the major risks of
investing in your business in a special Risk Factors section
within your business plan.
Use this Risk Factors section to list, in order of
importance, those risk factors you consider to be unique and
substantial risks to an investor in your business venture
based on the facts and circumstances of your business
There is no specific number of risk factors to include in
your plan. However, after describing a specific risk factor,
be sure to tell investors how you plan to mitigate it. This
helps show potential investors that you not only understand
the risks involved in your business but have plans to
Here are four categories of risk factors to consider
covering in your business plan:
1. Risk relating to the Company's Financial
Does your company have a history of losses with no
expectation for immediate profits? Has it ever operated
profitably since its inception? What is the company's
current retained earnings or deficit as of the most recent
financial statements? What were the company's earnings or
losses over the past three fiscal years or since its
inception, which ever is shorter? When will the Company
expect to become profitable? Is there any certainty it will
Examples of financial risks:
- Limited operating revenues.
- Limited capitalization.
- Substantial intangible asset.
- Dependency on funds to continue
- Adverse consequences of not obtaining
- Significant indebtedness.
- No history of dividends and no expectation of any in
the immediate future.
2. Risks relating to the Company's Business
What stage of development is the company (formation,
rapid growth, growth to maturity, maturity)? Has it engaged
in any significant operations to date? Is there any
certainty that the company will be successful in overcoming
the risks of development in order to advance beyond the
Examples of business risks:
- Uncertainty of market for product or service.
- Unproven product and business.
- Competition and existence of other entities engaged in
similar business which have greater resources.
- Limited or no manufacturing capability.
- Governmental regulation of products or services (e.g.,
licensing, environmental, etc.).
- Technological obsolescence.
- Need for additional financing.
- Trademarks, patents, royalties that are not owned by
- Dependence upon key personnel.
- Reliance on efforts of management.
3. Risk relating to the Company's Management
What kind of record does management have in similar or in
other prior business ventures? Which company principals
have operated businesses of this type prior to organizing
this company that resulted in losses to investors? Which
principals also operated other businesses in the past that
were not similar to this company and resulted in losses to
Examples of management risks:
- Substantial voting control of the company to be
retained by management or existing shareholders.
- Disciplinary or criminal history of any
- Substantial direct and indirect compensation to
- Substantial amount of proceeds being used for the
benefit of management.
- Conflicts of interest and transactions between
management and the company.
4. Risks relating to the Type of Investment Being
Will promoters own substantial promotional shares and
options? How many shares will promoters own and what is the
average price paid and how does it compare to the public
offering price. What options or warrants do the promoters
own? How and when are they exercisable and what average
Examples of Investment Type Risk:
- Immediate substantial dilution of investor's
- Risk of loss of the entire investment.
- Lack of a public market for the securities and no
assurance that a market will develop.
- Amount of shares of promoter's promotional shares
available for immediate resale.
Remember these are merely examples. Take the time to develop
your own risk factor disclosure that is applicable to your
specific business venture. It will show investors that
you've done your research and are ready to take your
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