Stronger cybersecurity makes your business more valuable
A recent data breach at Discord that exposed 70,000 users’ photo IDs serves as one more reminder that virtually every business needs effective cybersecurity. But before you write off cyber as just another necessary but unpleasant cost center, consider that it’s also a powerful driver of enterprise value.
Right now, as non-AI businesses, especially in the tech sector, are struggling to attract investor dollars, cyber can help firms stand out as high-class assets. Business leaders preparing for sale should look to cybersecurity to make themselves more valuable acquisition targets, while buyers should pay close attention to cyber while conducting due diligence.
Keep reading to learn more about why cybersecurity boosts business valuations and how to take action as a buyer or seller.
Why do businesses headed towards a sale need to invest in cybersecurity?
No business is safe from a cyberattack. But a company that plans to put itself on the market within the next one to three years is especially vulnerable, as a breach could depress valuation or, if it occurs during the sale process, even throw off the entire deal.
- Cybersecurity is an important part of valuing a company for sale. Think of it like a home inspection: Buyers and sellers should both consider a business’s history of security breaches, as damage, liability or other consequences from a breach can be both expensive and ongoing costs.
- Even if a company has a clean cybersecurity history, a breach is essentially inevitable. Buyers and sellers should view cyber risk like supply chain risk — a part of doing business — and understand that companies with a more hardened cybersecurity posture are better investments from a risk management perspective.
- Consider that not only could a company with a poor cybersecurity history struggle to achieve an attractive valuation, but also a breach could occur while a sale is in progress. Buyers could seek to renegotiate terms or even withdraw a letter of intent in response to a cyberattack.
- A cyberattack can also interfere with bringing a new product to market. Companies with weaker cyberdefenses face a greater risk of a strike during a product launch, which could limit investor interest or delay a sale.
- Potential clients or customers also increasingly expect a high level of cybersecurity readiness from vendors. If you’re selling enterprise SaaS software, for example, SOC attestation or HITRUST certification is table stakes.
- With so many investor dollars tied up in AI right now, cybersecurity represents a way for non-AI companies to build value and stand out. Should AI prove to be a bubble, as many analysts project, investors will be looking for greener pastures when the bubble bursts, so building up your cybersecurity now could pay off significantly down the road.
How to drive up your valuation using cybersecurity
Businesses looking to boost valuation via a stronger cybersecurity posture should align with a cybersecurity framework like SOC or HITRUST, conduct penetration testing and beef up resources by hiring a chief cybersecurity officer (CCO), either fully time or fractionally. Working with an outside advisor to test and audit cybersecurity is also crucial.
1. Consult a cybersecurity advisor
Cybersecurity is too multidimensional for your internal IT team to handle alone. Consult with an external advisor for guidance, penetration testing, auditing and help implementing a cybersecurity framework for your business.
2. Hire a CCO or a fractional CCO
Cyber is enough of a value driver that you should invest in hiring a CCO to oversee your security efforts. However, depending on the size of your business, a fractional CCO can deliver all the support you need without having to onboard someone in a full-time, in-house role.
3. Assess your defenses
Once you have an advisory team in place, you can assess your existing cyber profile to identify gaps or areas of need. Conduct penetration testing, undergo a SOC audit or assess what you need to do in order to earn HITRUST certification.
4. Implement a cybersecurity framework
After determining your needs, choose a specific cybersecurity framework to implement and put it into place. This will likely include updating your existing cybersecurity policies, enhancing your processes around data governance, deciding on metrics to evaluate your level of protection and ensuring that cybersecurity is an integral part of your company culture.
5. Invest in cybersecurity insurance
As even the best defenses can only mitigate the risk of a cyberattack, you also need insurance. An insurance plan shows responsibility and also alleviates risk in the event of a sale.
How do you choose the right cybersecurity framework?
To strengthen your business’s cybersecurity posture, you can choose to implement any one of several security frameworks. Popular frameworks include SOC, HITRUST and ISO — but the right one for your needs will likely depend on your industry, the size of your company and your proximity to a sale.
- SOC 1 or 2: These frameworks are ideal for software companies. You’ll need to complete a SOC audit to earn a SOC attestation that you can show to potential clients.
- HITRUST: Earning HITRUST certification works well for companies that handle sensitive personal information like medical data.
- ISO 27001: ISO cybersecurity certification, or ISO 27001, is a framework that’s a good fit for the manufacturing industry.
- BSA and AML audits: Financial institutions will need to conduct regular Bank Secrecy Act (BSA) and anti-money laundering (AML) audits
As you consider which framework might be the best fit for your needs, your customers or clients can provide guidance. Look at the RFPs you typically bid on. What kind of cyber framework are potential clients looking for?
Overcoming internal roadblocks
Companies often struggle to make cybersecurity a priority. When your team is putting out fires elsewhere, cyber can feel like a problem that can wait till tomorrow to solve — until one day, it becomes the fire.
That’s one more reason it’s useful to see cyber as a value-add. If you understand that stronger cyberdefenses equal a higher valuation at sale, taking action to upgrade your cyber capabilities starts to feel more like a core business activity.
Likewise, if you’re concerned about the upfront costs, do some risk modeling. Evaluate what you stand to lose from a cyberattack on your current systems against the lower risk profile you could have.
How Wipfli can help
We help business leaders strengthen cybersecurity defenses and boost valuation. Ask us to assess your cybersecurity needs and provide transaction advisory services to help you maximize value when buying or selling a business.
