Overlooked Risks to Business Owners

Disclaimer: I’m a big hockey fan. I played in college and now I coach my kids in the sport. And maybe it’s just me, but I find a lot of similarities between playing hockey and owning a small business— particularly when it comes to risk management.

Most hockey players are savvy enough to guard against the risks they face on the ice: they wear helmets, mouth guards and pads to prevent immediate injury while they play, and they do muscle-specific training to strengthen key areas. But like small business owners, hockey players are often less aware of the risks that threaten them off the ice. Poor nutritional choices, insufficient stretching, inadequate rest and even bad time management can derail a hockey career at any level (think college athletes who don’t set enough adequate study hours and end up failing out of school).

If you’re like most small business owners in the U.S., you’re probably well aware of the more immediate ways your business could be jeopardized: you don’t attract enough clients, your star employee quits for a better-paying gig, you can’t afford the new equipment you badly need. But chances are, if you’re focused on day-today operations, you may not even be aware of the more subtle ways your business could be derailed.

The first step toward preventing financial disaster is understanding what perils are out there and how you can protect your business. Here are some of the risks most commonly overlooked by small business owners and how to minimize your exposure.

Risk #1: Your contracts don’t shield you from liability

Contracts provide essential legal protection for your business, whether you’re using them for employees, clients or partners. Conducting business without contracts is akin to getting on the ice without pads: you may play the game injury-free, but the odds aren’t great.

And even with impeccable contracts in place, things can (and will) go wrong— and you could face massive liability exposure. When an employee sues you for discrimination or a client sues you for losses related to your work, appropriate business insurance complements the protection that contracts provide. And many insurance policies cover the physical costs of the litigation or damages. Having adequate business insurance means that even if something goes awry, you’ve got a backup plan that allows you to adjust and recover quickly.

Risk #2: Your personal assets could be seized in a lawsuit against your business

Many entrepreneurs believe their businesses are safe from lawsuits because they’re not worth suing. Unfortunately, this is not always the case. If your business is classified as a sole proprietorship or partnership, your personal assets (including your car, home and savings account) may be fair game if a lawsuit is brought against your business.

To avoid having your personal assets seized as part of a legal judgment or settlement, you can reclassify your business, but be sure to consult with an accountant and lawyer before making any major decisions. If you’d prefer to keep your current business classification (which many small business owners do for tax reasons), you can manage your risk by investing in certain types of business insurance, such as errors and omissions and general liability, which cover legal defense costs if a lawsuit is brought against your firm.

Risk #3: Your advice could cause clients financial loss and trigger a lawsuit

Business owners who provide consulting services or other forms of professional advice often think that they’re safe from client lawsuits. But imagine, for example, that you advised a client to switch to a cloudbased software system for all business operations, and that cloud server was hacked, compromising your client’s data. If the client decided to sue, you could be held liable for the advice you gave and any losses it caused your client, which, in this case, could easily exceed tens of thousands of dollars.

Mitigating the risk of lawsuits requires a three-pronged approach: contracts, communication and coverage. Contracts establish a project’s scope from the beginning and allow you to outline what a client can and cannot expect from the work you do. Ongoing communication allows you to identify any problems clients have in the early stages and fix them before they cause major losses or dissatisfaction. Coverage (particularly errors and omissions coverage) protects your assets in the event that something goes wrong and a client decides to sue despite your best prevention efforts.

Risk #4: Your insurance leaves you open to massive liability

Business insurance can go a long way toward protecting you from a variety of risks, but it’s not infallible—and it can leave you in the lurch if you don’t use it properly. Even if you carry insurance, it’s important to remember that you might lack coverage for a loss if:

• You’re relying on a homeowner’s policy to protect your home-based business. In reality, homeowner’s insurance rarely offers protection for businesses run out of a home office. Translation: If your business equipment breaks, one of your clients hurts themselves or another incident occurs, your homeowner’s insurance will almost certainly not cover replacement or repair costs.
• You’ve started and stopped your policy multiple times. Many types of insurance (including errors and omissions) work on a “claims made” basis, meaning that a policy has to be in force both when an incident occurred and when the claim is made in order to pay benefits. So a new policy can’t cover your former work, and a canceled policy can’t pay out benefits once it’s no longer active.
• You chose the lowest premium you could find. Like any other product you buy, you often get what you pay for with insurance. While some businesses need only very low levels of coverage, it’s best to consult with a knowledgeable agent about which types of insurance and levels of coverage will adequately shield your business from the risks it faces.
• You haven’t updated your coverage in a while. Any time your business changes (moving to a new office, hiring a new employee, etc.), so do the risks you face. Risk management strategies and insurance policies that were up-to-date a year ago could leave you exposed to massive liability if your business has evolved since then. If your company is in a growth period, check in with your insurance agent every few months to determine whether your coverage is still sufficient to protect you.

Risk Management: Plan for the worst and hope for the best

The key to effective risk management (and longevity in the game of hockey) is to prepare for the worst-case scenario. Not sure where to start? That’s understandable —after all, business insurance is complex and planning for the unknown can seem daunting. This three-step guide offers a starting point for any business owner looking to minimize risk exposure.

• Develop a risk management plan. A comprehensive plan should outline provisions for everything from who you’ll turn to if a key vendor goes bankrupt to how you’ll manage in the event of a natural disaster.
• Reevaluate your business as it changes. If you just scored a big contract or are expanding into new products, evaluate how this growth may impact your existing partnerships, contracts, and insurance. Growth is a good problem to have—don’t turn it into a bad problem by failing to update your protections.
• Talk with knowledgeable experts. They say talk is cheap, and in this case, they are often right: most professional service businesses will give you all the information you need to make knowledgeable decisions at no cost. You just have to ask.

Small-business owners tend to be an optimistic lot—after all, launching a business takes enormous confidence—and this characteristic is essential to the innovation and growth that fuel our economy. By taking a few hours to assess your risks and implement a comprehensive risk-management plan, you can let that optimism propel you forward knowing that you have a plan in place in case anything goes awry.