LOUISE FAIRSAVE: Small business investment

INVESTING IN A small business is the chosen route to building wealth for some people. However, carefully considering the commercial risks of a business is an ongoing and important task. Today, we look at the danger signs, especially for the would-be first time entrepreneur. 

For example, there is the risk that the technological, economic or social environment may change so drastically that the market for the business diminishes. Even environmental or health concerns may lead to developments that may wipe out or curtail certain businesses. The investor needs to forecast and prepare a response to such changes. 

Reading related business magazines, surfing the web about the particular area of business and talking with people involved in like businesses will help in keeping on top of the trends. Responses to expected changes should be planned on a scenario basis looking at the worst case, the best case and the most likely outcome.  A planned response is aimed at sustaining at least an acceptable return on the investment, and, where possible, at enhancing that return.

For those businesses which are started in the home of the entrepreneur, costing and pricing the product or service is critical in evaluating the return on investment. Underestimating the overhead cost of the use of facilities at home can lead to eventual failure of the business as it moves towards a more commercial basis.

Sometimes, the emotional attachment of an entrepreneur to his business idea is so strong that although he can project failure eventually, he holds on to his business until the bitter end. When an entrepreneur is so unreasonably attached to his business, rational thought is lost. When rationality is lost, all is lost. It is no longer a business but more likely a debt generating machine.

Businesses which are set up to be highly dependent on the knowledge and skills of a particular individual (or set of individuals) stand the risk of losing that key person through death or by him forsaking the business. The business could be devastated by such a loss. Key man insurance may assist in handling the risk of loss through death. The funds provided by the proceeds of such coverage can go towards recruiting and inducting a replacement. 

In the case of a sole proprietorship, the death of the proprietor is often the death of the business. Every sole proprietor needs to take extra care of his health.  Alternately, a sole proprietor could arrange the business so that he has a formidable deputy should he be incapacitated.

In the case where that skilled person leaves the business for other pursuits, such a loss could be critical to the business being able to survive. The risk of finding equal or better talent is also accompanied by the risks of the new candidate fitting in with the rest of the staff.  Worse, if the parting with the skilled individual is on bad terms and the individual bears malice against the business, the risks escalate.

Succession planning can also be a major risk for a sole proprietorship and for a family business. Although a parent may encourage his offspring to get involved in the business, the certainty of getting and retaining such interest in the family business seems to dwindle the further along in the generations one goes.   

Business undertaking is a brave endeavour as failure can be a source of deep pain. The greater the debt the business causes, the greater the pain can be. Some pitfalls can be avoided by careful and astute consideration, and by seeking the counsel of business experts.

Unfortunately, other pitfalls are virtually unavoidable, almost like the luck of the draw. Just remember that anyone who ends up saddled with debt is not necessarily a bad person. It is just the way it has turned out. It is important to understand that business failure can happen, even to you.

• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.