Even big, established companies can sometimes take questionable business risks—as you already know if you've ever heard a news report about a well-known company declaring bankruptcy or struggling with low sales.
Some decisions that upset a stable company are pretty obvious. Taking on a lot of debt can bankrupt a business; not training your employees is another obvious risk. And you can expose yourself to business risks if you don't check references when you hire employees or contract workers, like an accountant.
Yet many companies take on strategies that don't appear chancy and still find themselves on a possible path to a premature end. Things like:
1. Accepting a Big Client
Taking on a large client can be one of the business risks that hurt your company—even if it doesn't seem like it at the time.
“The payoff can be great. The customer can quickly increase revenues and profits, but the risk is also large," says Dayne Shuda, the owner of Eau Claire, Wisconsin-based Ghost Blog Writers. (His company offers blogging services for businesses.)
Shuda says that this is one of the business risks he has thought about for some time, ever since he toured a design agency about five years ago.
“Great people," he says. “On the surface they seemed to be doing well, and I'm sure they were. Then a few months after I was introduced to them, someone told me that they went out of business. I asked how that could happen, and the person said that the agency had lost its largest client.
“It seemed like overnight they went from comfortable to out of business," Shuda adds.
—Deborah Sweeney, CEO, MyCorporation
Ever since, Shuda has been careful about taking on too big of a client.
“I have turned down a few potential opportunities over the years that I knew were too big for our company. It may have been the wrong decision," he admits.
Maybe, or maybe it was the right one. In any case, business owners who are worried about a big client leaving the company in the lurch one day would be wise to start looking for other larger customers or several medium-sized ones. That way, they aren't too reliant on one steady source of revenue.
2. Not Having an Exit Strategy
Not preparing for failure doesn't sound like the largest of business risks. If your company is doing well, why think about how to shut it down?
But Jeff Schalk, COO of Fellows Financial Group, a Leesburg, Virginia-based financial services firm that works with businesses and individuals, disagrees. He says business owners should have “executable exit strategies" that they can go to if they want to retire or sell their company one day—or if the choice to fold isn't voluntary.
“Most business owners are occupied running their businesses on a daily basis and don't take the time to consider an exit strategy or even recognize that they should be prepared with one to be sure everyone is on the same page and headed in the same direction—especially, if they have partners," Schalk says.
You probably aren't courting chaos if you simply want to retire, but you may have to delay retirement without a sound exit strategy.
But if something goes wrong with a business partner? Not having an exit strategy isn't good, according to Schalk, who has seen it all.
“The involuntary scenarios create the most chaos within a company when the plans aren't well-established and -executed. This is when companies flounder, key people depart and, in many cases, the companies do not survive," he says.
3. Launching a New Product
As far as business risks go, introducing a new product doesn't sound like a gamble at all. It sounds smart.
And while it can be, it could also blow up in your face, according to Deborah Sweeney, CEO of MyCorporation, a website service located in Calabasas, California that helps new businesses incorporate and file trademarks.
How can launching a new product hurt a company?
“It can be expensive and time consuming, and can leverage a significant amount of resources," Sweeney says. “Like taking a loan, it can be costly."
Sweeney acknowledges that “often, without risk, there is no gain," so she isn't counseling any business owner to not launch a new product or service.
But, she warns, “unless your decisions are calculated and well-thought-out, a new product launch can be very expensive and a waste of money."
4. Making Your Reputation Part of Your Business's Appeal
This might sound crazy to solopreneurs who very much want clients to know that if they come to them, they'll be paying for superior expertise. But it can backfire if you're trying to grow your business, says Chris Jarvis, the founder of Jarvis Tower, a financial consulting firm based out of Southlake, Texas.
“You use [large] companies all the time and may have never known the founders. But, before you knew the household name of the company, you had to rely on something or someone," says Jarvis.
And this can become one of those harmful business risks when it affects your company's ability to scale, Jarvis says.
“I have had companies where my name was in the company name. I used my reputation to build these firms, but that was a bit of a prison sentence because it is hard to escape the fact that clients will want to work with you," he says.
It's something to keep in mind if you do want to hire employees to do what you're doing. You may want to market your company as having amazing talent, versus marketing your company's talented founder.
5. Paying Employees Too Much Money
Yes, you should pay your employees what they're worth and keep 'em happy. It's good business.
Still, Kym Yancey, co-founder and president of the businesswoman community eWomenNetwork, says that he and his wife Sandra once made a big mistake overpaying two salespeople. They each received $100,000 annual salaries, plus commission.
"But they never delivered," Yancey says. "Both of these people were very capable and came with proven success."
The high salary took away their sales urgency and energy to close deals, he says.
"The moral of the story here," says Yancey, "is not to pay your sales rep too much in salary where they lose the incentive to do what it takes to make a sale."
Of course, none of this means that business owners shouldn't take business risks or do things like overpay the occasional employee or launch a new product. Boldly going into the unknown can help a company truly grow—and as the saying goes, the biggest risk of all is often not taking a risk.
But if you don't want your business risks to end your company, keep in mind that liabilities are embedded everywhere, including when making perfectly reasonable decisions—and even in the decisions not being made.
Read more articles on risk assessment.