Over my professional career, I have had the opportunity to observe hundreds of businesses. One characteristic of successful businesses is that they know what it is that they do well, and stick to doing that. However, I have come across a sub-set of businesses and business owners who have attempted to branch out either into a similar side business, or added a certain business line to their existing business. In most cases, the side business made intuitive sense in that the skills necessary to conduct the owner’s primary business seemed that they would also lead to success in the side business.
But they just don’t.
Time and again, I have watched businesses branch out into similar areas believing that their skills would translate well into those areas, only to watch as the new venture/business line ends up pulling resources from the main business, without producing the hoped-for results. The fortunate businesses are often the ones that cut their losses quickly and return to what it is that they do best, while the unfortunate ones end up with the side venture pulling the main effort into bankruptcy.
But why does it work out this way, when all of the pieces seem to be there for a successful side venture/business line? In my observation, I have identified several pitfalls that seem to appear in these circumstances:
1.) The Owner Doesn’t Fully Understand Why They Are Currently Successful.
When one is looking at one’s own successful business, it is sometimes easy to overlook how complex the business really is and why one is successful. Many business owners have developed relationships throughout their industry with customers and suppliers; relationships that may not be relevant for the new venture, its superficial similarity to the current business notwithstanding. To succeed in the new venture often these relationships would need to be developed, which is a process that could take years.
Another factor in success is often that the owner/management has developed a “feel” for the existing business; a sixth sense that has been honed by years of operating in that business/industry. The new venture is invariably something in which this 6th sense has not been developed. This sense can take years to develop, if it does at all.
2.) The New Venture Takes Up More Of The Owner’s Time.
Opening a side business or adding a new business line will invariably cause the owner to have to spend a lot of time getting things up and running. Running a business is almost always a full-time job. Having a distraction, even if only for a little while, is often detrimental to the main business. This might not be a problem if the business has an excellent management team that can operate independently of the owner. However, many small-to-mid-sized businesses do not have this luxury. A distracted owner can result in deterioration of the main business venture. In some cases the main business can end up deteriorating to a point that it is difficult to recover from.
3.) Not Understanding The Complexity Of The New Venture.
Finally, I have seen businesses branch out into an area assuming that it is almost the same thing as to what they are currently doing, only to find out that it is a lot more complex than what they originally assumed. In my experience, this is the most common trap that businesses fall into. They fail to take into account critical factors, some of which might be only be understood by someone with experience in the business. They incorporate erroneous or unrealistic assumptions into their analysis and planning. The result is a failed venture.
In conclusion, I always advise businesses to be very careful when entering a side venture. Often the owner will see a profitable/ high margin side business line and want to expand to capture a share of these profits. The profit that can be achieved in this line is usually the result of being difficult/challenging to operate in this sector. The saying that “if it were easy, everyone would be doing it” is often relevant here. Simply put, the new venture is never as simple at one thinks that it will be. There is always something one isn’t seeing. The best advice that can be given is that when looking to enter a side venture, proceed with extreme caution.