Key takeaways
- Some business models aren't large enough to cover the cost of insuring them properly. Find that out before you form the LLC or sign the purchase agreement, not after.
- A risk advisor can tell you two things almost no one else can: what this business will cost to insure, and how businesses like it tend to have losses.
- Get advice from people licensed in that field. A CPA giving legal advice, or an agent giving tax advice, is a warning sign, not a bonus.
- The strongest small businesses work like they have a board: an attorney, a CPA, a banker, an HR professional and a risk advisor, each staying in their lane.
Every business owner should talk to a risk advisor before they buy a business or start one.
Most successful businesses lean on experts across accounting, legal, operations and people management. The challenge for small business owners is that they usually start because they see an opportunity, or because they have a skill that makes the opportunity look good. What they rarely have is the team that brings depth to all the other pieces that make or break a profitable business.
Insurance is one of those pieces. And it’s usually the last one people check.
The vending machine business
I was talking with a CPA one morning. He told me one of his clients wanted to start a vending machine business on a school campus. She expected to bring in about $4,000 a month.
He’d been advising her on whether to set it up as an LLC, and on what that would mean for her tax filings.
I asked him two things.
First: why are you giving legal advice? You’re not an attorney.
Second, and the bigger problem: has she talked to a risk advisor?
She hadn’t. Nobody knew what it would cost to insure the business. And that’s what I see over and over. An entrepreneur has a concept, but the model isn’t large enough to justify the cost of the insurance it takes to properly protect it.
Some business ideas don't survive the cost of insuring them. Better to know that before you sign anything.
Two questions to ask before you commit
If you’re looking to buy or start a business, talk to a risk advisor first, and ask:
- What will it cost to insure this business properly? Not the cheapest policy you can find, but the coverage the business, your contracts, your landlord or your client will actually require.
- What are the pitfalls of this specific business? Nobody knows how a type of business loses money better than the people who pay its claims. That knowledge sits with carriers and underwriters, and a good risk advisor brings it to you before you have a claim of your own.
If the numbers still work after those two answers, you’re starting on solid ground. If they don’t, you’ve just saved yourself a lot of money.
Stay with advisors who stay in their lane
That conversation with the CPA points to something bigger.
What’s one sign a professional should or shouldn’t be trusted? Whether they’re advising in an area they aren’t licensed or certified in.
| If you need advice on… | Look for… |
|---|---|
| Insurance and risk | A licensed insurance agent who works with your industry |
| Legal structure and contracts | A business attorney |
| Taxes and financial reporting | A CPA |
| Loans and capital | A business banker |
| Hiring and people | An HR professional |
| Growing the business | An advisor or coach with documented results |
You wouldn’t hire a plumber to work on your electrical. You wouldn’t take your car to a body shop for an engine problem. So why take legal advice from your accountant, or tax advice from your insurance agent?
That goes for professionals too. Advising outside your license is where good professionals get themselves and their clients into trouble.
Build your own board of directors
What I’ve tried to do with my agency is give my business owners something like an outside board of directors. I have relationships with business attorneys, vetted CPAs, vetted business bankers and vetted HR professionals.
Each of them affects whether a new business makes it:
- Hiring the right people
- Building the right business model
- Having enough capital and cash flow as the business scales
- Putting agreements and contracts in place so you get paid, and so risk is walled off before it can cripple a new business
When each of those experts handles their own piece, and talks to the others, the owner gets the depth that big companies take for granted.
If you’re already up and running, it’s still worth a look. Our five coverage gaps most DFW businesses miss is a good place to start, and if you’re using a personal vehicle for the new business, read what you’re exposing before your first sales call.
Frequently asked questions
Thinking about starting or buying a business?
