When to Diversify

The right time to diversify is going to be different for every business. Every business is unique, after all. Even with your business being unique there are some identifiers you can keep an eye out for that will give you a sense of when it makes sense to diversify.

On an aside, just because you CAN diversify doesn’t mean you should in your business. One of my businesses is very niche and vertical. There is no reason for me to diversify that business regardless of the opportunity. It’s designed to be narrow in focus and would require a complete change of the business to diversify. Since I am not interested in overhauling the entire business model it didn’t make sense to diversify. Of course, I opted to diversify how I spend my time and open up another business entirely, so, maybe we can have our cake and eat it too!

Here are a couple of tips on identifying when it’s time to diversify:

  1. Your market is becoming saturated.  No, I don’t mean competitive.  I mean, saturated.  As in your market share is a significant portion of the market and it’s more expensive to expand your market share than it is to expand the products or services you offer.  This is more common in a limited marketplace be it limited by geography, access or a regulatory body.
  2. Your passion and energy for the current business is falling.  Assuming you don’t plan to close up shop and/or become a silent partner in your business a new and fresh project may be exactly what you need to replenish your passion and motivation.  This can be a great signal that it’s time to diversify in your business.
  3. You have identified some serious headwinds that could cause major implications to how you do business.  The landscape we operate in shifts constantly.  What works today and what is successful today has no guarantee of being successful tomorrow.  If you, as an expert in your field, have identified a serious issue with the structure of your business moving forward you have three choices:  jump ship, re-deploy your entire model, invest in a diversified business model that will allow you to ride out the coming storm.  Either way, this is a tremendous signal to consider diversification. 

Once you decide to diversify it’s a question of how much should you diversify by. Again, all things we do should be experiments. When you consider your time, capital and energy as assets be sure to put a cap on how much of each you’re willing to commit. Perhaps your one business is on autopilot so you can put a substantial amount of time and energy into the diversification. If you do that, limit the capital exposure. A good benchmark to work from, no less than 10% of your non-essential resources and no more than 25% of your non-essential resources. What do we mean by non-essential? We mean the resources that are not INTEGRAL to running your current business model.

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