Owning a business has many benefits:
- Freedom to make your own decisions
- Ability to do what you enjoy every day
- Ability to make a substantial impact
- And so much more
But it also means you have a lot you need to think about. More responsibility, more problems to solve….
And more risks. Also known as, the “what if’s?” of life.
“What if I wasn’t here tomorrow… would my business still operate?”
“Would my family be okay?”
“What if I lose my biggest customer?”
“What if I lose my best employee?”
Here are 6 risk management mistakes that I see many business owners make:
1) Commingling personal vs. business income & expenses
Not only can this cause a headache for you or your accountant from a tax filing standpoint, but it can also a huge liability risk if you mix your personal and business expenses.
If you don’t have an LLC set up, your personal assets may not be protected from lawsuits in the business if you aren’t distinguishing your personal expenses from your business expenses. You may lose out of the protection offered by an LLC when you do this. It’s crucial that you always keep these separated.
2) Too much customer concentration
A healthy business is one that has a large pool of customers. If a large percentage of your revenue comes from a small subset of customers, this can put your business at high risk if something happens to this specific portion of your customer base. For example, imagine a black swan event like COVID happens and your largest customer gets shut down from an unexpected pandemic lockdown. Consider diversifying your sources of revenue. Not only can this limit your risk, but it can make your business much more attractive if you try to sell one day.
3) Lacking proper business insurance
Every business owner knows they need insurance to protect their business. The confusing part is figuring out which types you need. You don’t want to be overpaying for insurance, but you also want to make sure you’re limiting the risk of expensive lawsuits and headaches.
Generally, the primary insurance coverages business owners should have are: worker’s compensation (to protect your employees), general liability insurance (protect against business accidents), commercial property insurance (protect your building and equipment), and professional liability insurance (for business mistakes and protection from accusations).
Depending on your business, you might even want to consider going one layer deeper into other coverages such as cyber liability insurance, employment practices liability insurance, commercial auto insurance, etc.
With business insurance being such a broad topic, it is critical to work with an insurance broker who can provide you with advice based on your specific circumstances and help you find the right company.
4) No buy-sell agreement
If you have a business partner, or multiple partners it is important to have a funded, buy-sell agreement in force. A buy-sell agreement provides a plan for the orderly transfer of any owners’ business interest in the event they depart from the company.
Business owners generally work with an attorney to help them draft this document. However, there are 2 mistakes we often see with them: (1) owners forget to update their agreement, which can lead to an incorrect transfer and unhappy owners, and (2) the agreement is not funded, or improperly structured. Many times a buy-sell agreement is triggered by a catastrophic event such as (death, disability, divorce, etc.) A huge problem occurs when one of these events happens and the company needs to scramble to figure out where the funds will come from to execute the buy-out agreement. In the event of death or disability, this can often be addressed by having an insurance policy in place.
5) No key-person insurance
We find that many business owners overlook the need for a key-person insurance policy until they talk with an advisor. Most businesses have an employee or owner that they consider to be extremely valuable to the company. Key person insurance can help protect the company in the event that key worker passes away. Often one overlooked point is key person disability income insurance. It is important to consider putting a plan in place to make sure the company can calmly and effectively continue operations, even without this crucial person.
6) The majority of your wealth is locked up in your business
The reality is that for most business owners, it’s not uncommon that much of their wealth is locked up in the value of their business. It often takes years and years of reinvesting money back into a business to make it successful. Then the day comes when an owner finally starts to think of transitioning out, and it makes it much tougher to create a plan when everything relies on how much the business can be sold for. A business owner who has assets outside of his/her business is typically in a much stronger position because they have more options. In order to protect against this, owners should consider diversifying their wealth little by little as early as possible. Imagine you pour your heart into your business your entire career, only to realize that you are unable to sell it for as much as you expected, and the proceeds aren’t enough to fund your lifestyle? Diversification cannot be emphasized enough.
When it comes to operating a business, protecting what you’ve built is just as important as is growing the business.
The blog is for general information only and is not intended to provide specific advice or recommendations for any individual. Readers should consult a qualified financial professional determine what’s appropriate for their situation.
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