Why diversify? Diversifying your business can cut your risk—or raise it

Custom Home, March, 2005 by Al Trellis

Diversifying into other businesses. There may be other income possibilities that take advantage of your skills and knowledge. You may teach a course at the local college on building or estimating. For years, I taught a course on how to build your own home. Once people realized how complicated building a home really is, many of them asked me to build a home for them.

You can be an expert witness or consultant on home building. Or you can become a dealer for housing-related products, such as steel frame buildings.

The danger here is that you can lose your focus, especially if the businesses are unrelated. Concentrating on one business at a time is hard enough; concentrating on two can be impossible. If you have someone who can manage the second business for you (if your wife has special skills, for example) then it becomes a diversification of assets (money) rather than a diversification of management resources (time). And that works.

Personal experience. From my personal experience, I've tried several diversification strategies. My partner and I started out as custom home builders in the Columbia, Md., area. I've always enjoyed public speaking and found myself teaching seminars through builder groups. I also began writing articles for BUILDER and CUSTOM HOME magazines, and those activities led to management and marketing consulting opportunities with builders throughout the country.

Over the years, we've diversified our consulting services as well. We added a residential designer to help clients with portfolio design and land planning. Many of our clients are now equity partners, where we provide services and financing in exchange for a share of the profits. We found that by offering the entire range of services in one place, we were better able to serve our clients, and it made our services that much more valuable.

What works for you?

So what's the final answer? Just ask yourself these questions:

* Why am I diversifying? Am I successful in my present business?

* Do I have the skills it takes to succeed in the new business?

* Is the new business countercyclical to my present business?

* Will the new business spread my risk, or intensify it?

* Will the new business divert management focus, so that neither business is managed well?

* Are the new opportunities commensurate with the risk?

If, after answering all those questions, you still feel you should diversify, then by ,all means go ahead. After all, they're your eggs and your baskets. Just make sure that, whatever you do, you watch those baskets.