From E065: Capital, Investment & Politics
In a recent episode, I asked the question …
At what point in a business’s life cycle should you start investing money in mitigating risk?
We were discussing supply-chain risk.
The conversation centered around how big you need to be in order to build your own domestic manufacturing.
It’s easy to talk about the justification for a business like Hexclad investing in manufacturing.
But we missed an opportunity to discuss something that is really important to every business owner.
If I could do it over again, I would push us to talk about more than just manufacturing.
I would ask what are the ways that businesses should invest money in risk mitigation when they are much smaller.
What are the most effective ways to invest money in insurance and risk mitigation?
This is an intensely practical area.
And yet, rarely talked about.
For a small business, it can be deadly.
Here are a few examples of ways you can invest in disaster prevention.
Hire enough team members to cross-train.
Redundancy costs money and time, but every company goes through a stretch where a key team member leaves or is temporarily sidelined.
What happens if you lose a key contributor and no one else has the institutional knowledge they held?
Create a good operating agreement.
We used Legal Zoom to do our original documents. Eventually, you should pony up for a lawyer to go through the process with you. It will help you to think through uncomfortable questions and increase alignment.
I cannot tell you how many horror stories I’ve heard that originate with poorly written or unclear operating agreements.
Buy life insurance and recall insurance.
As your company grows in value, so do the tax consequences if an owner dies untimely. Nothing fun about this one. At some point, you need to do it.
The same goes for recall insurance. For example, I know of a business that will be going through bankruptcy because they didn’t have recall insurance. Speaking of which …
Spend more on QA and testing.
The biggest threat to most consumer businesses is a lawsuit or a recall. Dealing with a problem once a bad product has shipped to customers is 1000x more expensive than catching it in the cradle.
We once shipped a million water bottles with a bad valve. We caught it early enough that very few customers received them. Still, it required a three-month rework by hand that took thousands of hours.
Of course, this isn’t an exhaustive list.
There are many things that don’t drive revenue but become necessary as your business grows to protect the value that you’re creating.
The hard part is judging when the time is right to apply them to your company.
