Business legal risk is a wide category, and applies to any event or circumstance that has the potential to prevent you from achieving your business goals or objectives. Business risk can be external (such as the global economy), or internal (such as your strategy).
Different types of risk should be managed and treated differently. You should understand exactly what type of risk you are facing before you can plan how to deal with it.
Types of business risk
The four main types of business risk include:
Regulatory
Legal business risks related to regulatory matters are potential challenges or liabilities that arise from non-compliance with laws, regulations, rules, and guidelines imposed by governmental bodies or industry regulators. These risks can have significant financial, operational, and reputational impacts on your business – resulting in potential fines, penalties, litigation, and other adverse consequences.
Some examples of regulatory business risks include:
- Legal and regulatory disputes – Failure to comply with regulatory requirements may result in legal and regulatory disputes, including litigation, investigations, and enforcement actions. These disputes can be time-consuming, costly, and may require businesses to allocate significant resources for legal defence and resolution.
- Operational disruptions – Regulatory non-compliance can lead to operational disruptions, such as shutdowns, product recalls, and suspension of business licenses or permits. These disruptions can result in lost revenue, decreased productivity, and damage to business reputation – impacting the overall performance and viability of the business.
- Changes in regulatory landscape – Businesses are subject to changing regulatory landscapes, with laws and regulations evolving over time. Failure to keep up with regulatory changes and adapt business practices accordingly can result in non-compliance risks. This includes changes in areas such as taxation, trade policies, employment regulations, industry standards, and more.
- Legal and contractual obligations – Regulatory non-compliance may result in breaching legal and contractual obligations, including contracts with customers, suppliers, and partners. Breach of legal and contractual obligations can lead to litigation, financial penalties, and damaged business relationships.
Disputes
One of the most common types of legal risk is a dispute – a term used to describe a legal claim made against your business.
There are many different types of corporate legal claims, including those involving product liability, accidents in the workplace, stakeholder disputes, and employee misconduct. When a claim is made against your company, you need a qualified professional on your side.
Common types of dispute-related business risks include:
- Legal – legal disputes include arbitration, or other legal proceedings, related to contract disputes, tort claims, intellectual property infringement, regulatory violations, employment disputes, and more. Legal disputes can be time-consuming, costly, and result in financial damages or other legal remedies, affecting your business’s bottom line.
- Customer – potential disputes relating to customers over matters such as product/service quality, warranties, refunds, billing, or other issues. Customer disputes can result in financial losses, negative customer reviews, and damage to business reputation, impacting customer retention and acquisition.
- Intellectual property – patents, trademarks, copyrights, or trade secrets, including infringement claims or challenges to intellectual property rights. Intellectual property disputes can result in legal actions, financial damages, and reputational risks.
Contracts
Contract risks occur when there is the chance that a financial loss could occur – either because you have failed to adequately manage the obligations or benefits of the contract, or because the buyer has reneged on the contract. The contract management process is pivotal here so that you can have a complete understanding of your exposure to contract risks. Poor contract processes are often to blame, for example, the inability to close a contract on time, non-compliant terms, and manual errors.
Assets
Your business might face asset risks. These relate to your tangible assets – including business buildings – as well as your intangible assets. These typically include intellectual property, trademarks, and human capital. It’s essential to take steps to protect your business assets.
Typical asset-related business risks include:
Physical asset risks – These risks involve potential damage, loss, or theft of physical assets, such as property, equipment, inventory, and vehicles, due to natural disasters, accidents, theft, vandalism, or other events.
Obsolescence risks – These risks relate to the potential devaluation or obsolescence of assets due to changes in technology, market trends, or regulatory requirements. Assets that become outdated or obsolete may lose value or become non-competitive, resulting in financial losses or the need for costly upgrades or replacements.
Intellectual property risks – These risks involve potential challenges to a company’s intellectual property rights, such as patents, trademarks, copyrights, or trade secrets. Intellectual property risks can include infringement claims from third parties, challenges to the validity or enforceability of intellectual property rights, or loss of proprietary information. Intellectual property risks can result in legal actions, financial damages, and reputational risks.
Supply chain risks – These risks involve potential disruptions or vulnerabilities in the supply chain that may impact the availability or quality of assets. Supply chain risks can include disruptions in the sourcing of raw materials, delays in transportation or logistics, quality control issues with suppliers, or geopolitical risks.
Theft and fraud risks – These risks involve potential theft or fraud by employees, customers, or other parties, leading to the loss of assets or financial resources. Theft and fraud risks can include embezzlement, theft of inventory or equipment, fraudulent financial transactions, or unauthorised use of company assets.
Wrapping up
Business risks are inevitable and can come in various forms, including legal, regulatory, dispute, and asset-related risks. It is crucial for your business to identify, assess, and manage these risks proactively to mitigate potential negative impacts on your operations, financial performance, and reputation.
Achieve this through thorough risk assessments, implementation of robust risk management strategies, and adoption of best practices in areas such as legal compliance, regulatory compliance, dispute resolution, and asset management. Consider having appropriate insurance coverage, implementing security measures, and having contingency plans in place to minimise the potential consequences of risks.
Give me a call to talk through your business risk requirements.