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5 Questions to Ask Before Diversifying Your Business You've got the revenue to reinvest in something new, but is that your smartest move?

By Christopher Massimine Edited by Micah Zimmerman

Opinions expressed by Entrepreneur contributors are their own.

Companies often invest in growth when they hit their financial milestones. When there is consistent demand over supply, it allows riskier opportunities to arise. One of these risks is diversifying your income streams through moving new products. Though popular and with a potential for greater reward, this doesn't always work out as planned, and the new product presents unique challenges to overcome. If your company isn't ready for a serious change, you will experience deep losses. This is why you must be prepared to ask yourself five crucial questions before diversifying your product.

Related: Why Diversifying Business Revenue Streams Is Crucial To Your Success (And How To Do It)

1. Is there a proof of concept?

Ask yourself questions like: Has your new product been in any industry research or trials? Does it already exist, and do you believe your company can improve it with a competitive price? If you're in a position to diversify, chances are you have generated enough revenue to invest in product testing. It's a good idea to develop and refer to a proof of concept before going all in on a new product.

This may mean reallocating some of your financial resources to research and development. Having the product in a discreet and controlled pilot phase will allow you to thoroughly experiment and explore the full spectrum of pros and cons. It's better to learn whether your product "has legs" in the testing phase than after mass production. If all goes well and you've identified an attractive target market, you'll be better positioned to attract support to move forward and make public announcements. In your worst-case scenario, you may lose a sleeve, but you'll keep the shirt.

2. Have you developed a consensus?

If your team isn't motivated to change its work model, it will make no difference whether your new product is revolutionary or not. It would help if you understood within your team that the next step is the right step for the company and employees. Otherwise, you'll end up with low productivity and lower morale. Remember that your staff knows your business a lot better than you do. You are responsible for being transparent about the path ahead, whether there will be adequate hiring and what type of support will be available. You also have a responsibility to take feedback. If a substantial majority of employees are in doubt, you may want to think twice before moving forward.

Related: 4 Ways an Entrepreneur Should Diversify Their Income

3. Are you equipped to handle the change?

Conduct a complete evaluation of your organization and plan for what infrastructural growth is necessary for you to continue producing your proven product while developing a new one. What departments will need to expand? What technology will you need to source for production? What does marketing look like? You will essentially be doubling the workload, which means having an actionable timeline to account for the change management.

To do this effectively, you'll want a strong business plan and an acquisition plan for the resources to back it. If you're not in a position to grow smart, your chances for success are not great. It takes a well-oiled machine to operate in the long term. If you don't address the whole machine, it will rust and eventually break. It's always harder to correct your course midstream. You are better off being proactive in your planning and realistic about what, how and when you can enact your change.

4. Does the change adhere to your brand?

I don't know about you, but I'm not going to purchase a medical device from a bakery. You chose an industry when you got into the business. While I'm not discouraging anyone from expanding into different sectors, I am saying it should make sense.

There are very few Yamaha's in this world, and they only got to be that way after making a series of logical product diversifications. First established as a piano and organ manufacturer, Yamaha branded music as an essential part of life to segue into the general lifestyle market. From there, it expanded into the sports lifestyles market while simultaneously evolving its acoustic pianos into electronic keyboards, and then it designed instrument audio support intended for the electronic keyboard. They followed this by widening their musical instrument product scope while diversifying their electronics capabilities. Shortly afterward, they moved into the general electronics space and entered the communications solutions field. Today the branding ties all of these things together in a very clever way, with the one thing they all have in common: Yamaha-make waves.

You will confuse your customers if your new product is not on brand. They know you by the success of your original product. Introducing a new product so far removed from your business will likely lead to questions about qualifications and expertise. Consumers will still question your move even if you make all the suitable hires and bring in top authorities.

If you're a public company, this could tank your stock value. You risk losing more customers than you'll gain if you're not on brand. Be sure the narratives you're crafting around the new product tie into your company and its original product in a credible way. Remember that the new product is a boon for your company's mission, vision and overarching goals.

5. Can you survive failure?

When businesses diversify their products, failure is par for the course. Ensure your business has a healthy reserve intact if you brace stormy waters during manufacturing, distribution and sales. You should always have some sort of safety net available to offset your losses — and enough of one to ensure the business can continue should you pull the plug on your new product.

Risk management is a big part of growth. Indeed, you cannot account for everything, but you surely can minimize losses and plan for contingencies. If you're not able to meet forecasted profit targets or if there is a need for a public recall of the product or if competition undercuts your markets, you need to be able to remain standing when the dust settles, embrace the setback and focus on the future.

You can only do this if you're financially ahead of the game and have planned for victory and defeat. If you can live another day, that alone proves the success and sustainability of your company as a whole, even if you can't risk another attempt at diversifying income streams for some time. You may need the time to build back any consumer confidence you've lost.

Related: How to Diversify Your Business Interests

Chris Massimine is the CEO of Imagine Tomorrow, a firm that shepherds and sources capital for creative works. Massimine is also a business development consultant, an international theatermaker and executive producer of the upcoming film "The Inventor."

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