Many business owners overlook the risks of running their own enterprise. Here are common traps that I’ve seen over the years.

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Many business owners and those who embark on new business ventures have the typical rosy and optimistic outlook of an entrepreneur.  They see all the great potential of their business ventures and the rewards of realizing that potential.

However, they often fail to consider risks and ways to mitigate them. They don’t always take advantage of help that is available to them for purposes of identifying and prioritizing by degrees all the risks and the associated effects if these risks become reality.  

Every business plan should identify risks, keeping in mind that as the company hits certain milestones and growth projections, these risks will change.  

Once the risks are identified the owner must consider what can be done to remove them outright, reduce the likelihood of the risks occurring, reduce the effect if they do occur, and then have a plan for moving the business forward in spite of the effect of the occurrence of the risk.  

Unfortunately, some risks can’t be eliminated or the effect mitigated, other than having cash to deal with the occurrence, thus the need for various insurances.

Each business and ownership situation has its own unique risks over and above the general risks that are prevalent in most businesses.  Each item has to be considered in the context of the specific business, ownership, employee, technology, asset base and business operations situation.  Some insurance products businesses should carefully consider:

Key person life insurance.  What happens to the business if the key person or persons die?  E.g. a star sales performer with critical customer relationships or key technology driver who provides the company’s competitive edge?  The business needs cash to find a suitable replacement and cover losses while the replacement is found and begins to have a positive effect.

Key person disability insurance.  This is not for the affected person – this policy pays a company so that it can afford to hire temporary help while the key person is disabled and not able to contribute to the business.  The temporary help may be a high priced contractor.

Fire insurance on both owned and leased premises and all contents therein, including personal contents of employees stored there, such as computers, tools, software, etc.

Business interruption insurance.  A business may have its operations curtailed or shut down for a variety of reasons and, without business interruption insurance, can quickly be forced into insolvency and even bankruptcy.  

Third-party liability insurance.  Discuss with an insurance professional how wide-ranging the policy is in order to be protected against the damages the business may be liable for because of defective products, missing critical delivery dates, various actions by the company’s employees to people external and internal to the company, a visitor tripping on your lobby carpet and cracking their head while falling, etc.  The range of legally actionable acts and outcomes of corporate behaviour continues to grow and the damages awarded also appear to be growing.

Errors and omissions insurance.  This is generally really a “malpractice” insurance to cover the actions and services of professionals and businesses that provide service of a specialized or technical nature.  Typically this type of insurance is utilized by engineers, lawyers, accountants, brokers, consultants and even construction companies and others of that type. The insurance covers damages caused by the provision of the service that is not a result of negligence or professional misconduct.  This type of coverage also often covers the legal defense costs of fighting allegations of wrongdoing and damages.

Anticipating shareholder and partner disputes. When a company is first started business partners and shareholders only see the upside. As the business evolves, things change and not everyone will always agree with the decisions made and the direction the company is taking.  Shareholder disputes are a risk most small businesses do not plan for, but it can bring the business to its knees.

Any business that has more than one shareholder should have a properly documented and executed shareholder agreement so that there is certainty as to how specific possibilities or eventualities will be handled. Proper legal advice is required to draft this type of agreement. It is a very important document that should be seriously thought out to express the very committed intentions and objectives of the shareholders.