How to Manage Business Risks When Building a High-End Brand Highlighting the risks in your business and presenting solutions can earn the trust of potential investors.
Opinions expressed by Entrepreneur contributors are their own.
Building a high-end company requires the ability to mitigate many variables. At the same time, risk-management skills provide potential funding partners a real insight into you as a business leader. From product risks, to market risks, and from financial risks to execution risks, articulating different variables have a massive impact on your credibility as an entrepreneur.
Dismissing risks from your business plan can either suggest you don't believe there to be any or that you are intentionally avoiding disclosing them. Risks are an essential piece of information lenders are looking for. Investors are concerned with balancing the risks versus increasing business value. It's in your interest to demonstrate you understand their need and present a plan to minimize these variables.
Let's take a look at the uncertainties for a new high-end business, how to create a framework for analysis and the most effective way to disclose them to potential investors.
How to face uncertainties when building a high-end small business
In these uncertain times, building a new high-end company requires the ability to "navigate the now," manage post-pandemic priorities and shape the future. If established luxury brands are struggling with challenges that range from expanding their customer base to younger generations to corporate responsibility and sustainability for a luxury startup, risks for a luxury startup can be grouped into the following categories:
- Luxury market risks. This risk refers to whether or not there is sufficient demand for your high-end product and service. Conducting a market opportunities analysis and niche segment sustainability research helps mitigate the market risk.
Competitive risks. A SWOT analysis helps you understand your strengths, weaknesses, opportunity, and threats within the luxury competitive landscape in which your company operates.
Technology and operational risks. Can your team finalize the product design within the assigned budget? Or by the cutoff date? These variables are part of the operational risks and can be controlled with experience and careful planning. They direct impact your credibility as a brand and the ability to meet the brand's promise.
Financial risks. For startups, the financial risk stems from not having a backup plan in case investors and lenders say no. Prepare a solid business plan that includes a forecast, a financial plan for the next three-to-five years, and a risk-management plan to demonstrate your acumen as an entrepreneur when asking for funds and gain more trust in potential investors.
People risks: People risk is the least predictable variable of any business. Establishing a clear vision and culture for your team from the beginning helps mitigate these risks. A combination of 60% management expertise and 40% style is in my opinion the right mix when hiring a luxury sales manager.
Legal and regulatory risks. Hiring a professional and retaining the right attorney is not enough. Follow their counsel to avoid legal and regulatory risks.
Systemic risks. For risks that threaten the viability of entire markets, you want to continuously and rapidly evolve structures and processes to help your business survive.
How to disclose business risks with a management plan
A powerful tactic to position yourself as someone who has a handle on their business is presenting the solution to mitigate risks. If disclosing the weaknesses of your startup luxury business is a concern for you, then approach investors with a solution on how you plan to mitigate variables. What are the steps you are taking to minimize the impact of the risks that you have identified?
Risk management consists of identifying the key risk factors and studying possible ways to decrease the likelihood of occurrence and impact. A solid risk management plan increases transparency, builds confidence and enhances understanding. It starts by classifying the risks, their likelihood of occurring and their impact.
A framework for classifying risks, their probability and impact
Risk management is about identifying what could go wrong in your high-end small business operations and what should be done to mitigate those risks cost-effectively. Risk management is a combination of art and science and must be among the entrepreneur's core competencies. Different skills such as creative thinking, analysis, forecasting and problem-solving are necessary to identify risks and how to best mitigate them.
A framework for classifying the different variables can be helpful. All risks have two dimensions: probability or likelihood of occurrence and impact or severity of the potential consequences. A risk can be probable, possible, or improbable. Its impact can be acceptable, tolerable, unacceptable, or intolerable. By combining these two dimensions together in a matrix, you obtain different combinations of probability/impact. For example, the risk of a supplier going out of business can be possible and tolerable if you have alternative suppliers. Or, it can be possible and intolerable if you don't have other options.
Assessing your business risks
Tailoring a risk management plan to your reality means identifying and assessing the risks in conducting your luxury small business, evaluating ways to mitigate them, developing a contingency plan, communicating the plan and training your team, assigning responsibility for the task, and monitoring new risks.
After identifying a new risk, it is important to ask yourself if the benefit of mitigating a risk outweighs the cost of doing so. Your decision depends mostly on your risk tolerance. And that it is personal to you. As a living document, your risk management plan should be always revised and updated.
Honing your agility will help you in sensing, anticipating, and responding efficiently and effectively to constant changes that are occurring or are likely to occur.
Playing the long game: Deliver on superior brand promise
Risk management is essential because unpredictable variables can not only impact negatively the investor's funding decisions but also the user experience. Ultimately, risk management helps you deliver your brand's promise.
Everything your high-end brand communicates and impacts the lives of your clients is considered a brand promise. Successful luxury businesses always uphold their brand promises. In spite of variables and risks, leading with what you can consistently deliver helps you manage customers' expectations.
If you're at an early development stage, be mindful of how you position your brand. If you build trust early and often, continuing to keep the promises you have made, you have more probability of long-term sustainable success.