Business diversification means expanding a company’s activities into new areas, be it new products, services or markets. For a family business, diversification can be a way to provide stability and protect business income in times of economic uncertainty. A corporate lawyer can help you set up the legal structure, contractual relationships and asset protection so that a new direction is not a legal risk, but an opportunity.
Diversification is a strategy in which a business expands its activities outside its core business – for example, introducing new products, entering new markets, or changing distribution channels.
The aim of diversification is to spread risk and ensure more stable business income even in periods when the original business is in decline.
From a corporate lawyer’ s perspective, diversification is not only strategically important, but also legally – each new area may mean new contractual relationships, different tax rules or licensing requirements. Successful diversification must therefore be based on solid legal foundations.
Expansion of activities affects the financial stability of a company. Diversification may require investment in new technology or staff, bring initially lower profits and bring new tax liabilities or the need to separate the accounts if a new company is set up.
Therefore, from a legal perspective, when diversifying, the entrepreneur should consider separating the activities into separate entities (e.g. LLCs), have a clear relationship between parent and subsidiary and ensure tax efficiency.
The benefits of diversifying a business are primarily in the greater stability and long-term sustainability of the company. By diversifying into more areas, a business reduces its dependence on one market or product, meaning that a possible drop in demand in one part of the business will not threaten its overall existence.
In addition, diversification enables more efficient use of existing capabilities, technology and know-how – what a business has built up for one segment can often be easily applied in another. Naturally, it also strengthens its brand and increases its competitiveness by being able to offer a wider range of services or products to different customer groups.
Last but not least, diversification increases a company’s resilience to economic fluctuations. A business that has multiple sources of revenue can better cope with crises and seasonal downturns. However, it is essential that diversification is managed by someone who really understands it, and that it is done sensibly and on a sound legal and economic basis. Without these, it can lead to chaos, financial losses and legal disputes instead of growth.
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There are several forms of diversification, which vary depending on how far the entrepreneur deviates from his or her original industry.
Horizontal diversification is the extension of the offer to products or services that are closely related to the existing business. In practice, this may mean that a family-run food business starts to offer catering, delivery or its own e-shop in addition to its normal sales. Such a move usually has a logical follow-up – existing know-how, existing production capacities and customer loyalty are used.
Horizontal diversification is particularly attractive for smaller or family-owned businesses, as it does not require a radical change of direction, but allows for natural growth within a known industry.
From a legal perspective, however, it is important not to forget the new obligations that come with business expansion. These may include updating terms and conditions, entering into new contracts with suppliers , obtaining necessary permits or registrations, or adjusting licensing and brand protection. The area of copyright also deserves special consideration when product design or marketing content comes into play. In such cases, the role of the in-house lawyer is to ensure that all new contracts, registrations and documentation comply with legal requirements.
Vertical diversification means expanding a business ‘up’ or ‘down’ the production or supply chain. When a company expands downwards, it starts to source raw materials or components that it used to buy. Conversely, when expanding upwards, it will focus on the distribution or final sale of its goods. A typical example would be a furniture manufacturer that opens its own network of stores or launches an e-shop.
This approach gives the entrepreneur more control over both quality and margin. However, it also brings new obligations – legal, tax and often labour.
Entering new links in the chain means the need to enter into additional contracts, to deal with distributors, carriers or employees , and to hold themselves accountable for product quality or safety.
For a family business, vertical diversification can be a way to increase independence from external partners and provide more stable business income.
Geographic diversification means expanding a business into new territories or markets. It can be expanding from a regional to a national level or entering a foreign country. In practice, this is often a step that stable family businesses take – for example, a Czech beverage manufacturer starts supplying Germany or an online business expands its services to Slovakia.
This type of diversification brings with it significant opportunities, but also legal risks. Each market has different rules for trade, tax registration, consumer protection and intellectual property. Thus, when diversifying geographically, entrepreneurs must deal with VAT issues, import permits, contract languages and brand protection in new jurisdictions.
In such cases, an experienced corporate lawyer will help map the legal framework of the target country and prepare the necessary documentation to ensure that the expansion does not lead to a violation of local regulations.
Geographic diversification is a natural step when the domestic market ceases to grow, and for many family businesses it is a way to secure long-term business income.
Unrelated diversification means that a business decides to enter a completely new industry that is unrelated to its existing business. This form is the riskiest of all, but can also yield the highest profits. A typical example might be a traditional manufacturing company that starts an online business – for example, creating an educational platform, launching an e-shop with complementary products or investing in an IT start-up. Companies usually resort to this move when they are looking to stabilise business revenue and want to use spare capital.
A careful analysis of risks and legal obligations is required when diversifying unrelatedly. Entering a new industry means navigating different laws, regulations and business practices. For example, online business brings obligations to comply with GDPR rules, copyright, consumer protection or platform licensing terms.
Unrelated diversification is a test of strategic thinking and adaptability for entrepreneurs. If properly managed and regulated, it can bring entirely new opportunities and ensure long-term stability even in periods when the original market is stagnant.
Tip: A company’s liquidity is its ability to pay its short-term liabilities on time and turn assets into cash without unnecessary losses. We will advise you on how to work with liquidity and what to watch out for.
In recent years, more and more businesses are choosing to enter the online environment – whether it is e-commerce, digital services or online marketing projects. For a smaller or family-run business, this is often the quickest way to diversify revenue, as online business requires less start-up capital and allows you to reach a wider market.
From a legal perspective, it is important to think about data protection(GDPR), obligations under the E-Commerce and Consumer Protection Act, copyright and content licensing, getting the terms and conditions and complaints policy right, and taxation of online sales revenue. We are happy to help you with this.
Tip: Has your business grown and no longer suits you in its current form? If you’re thinking about starting an LLC, read our article that will take you through the process step by step.
Business diversification is a strategy that allows firms to expand into new areas and thereby increase stability and resilience to economic fluctuations. For the family business, it is a way to protect and strengthen business revenues, leverage existing know-how, and remain flexible to changing market conditions. Depending on the focus, this can be horizontal diversification, where a related product or service offering is expanded, vertical diversification within the supply chain, geographical expansion into new markets or non-related diversification, i.e. entering a completely new industry, often in the form of an online business. Each of these steps has its own legal, tax and financial implications – from the need for new contracts, licenses and intellectual property protection to the set-up of relationships between the different entities of the business. Properly managed, diversification can better leverage capacity, strengthen the brand and increase competitiveness, but only if it is underpinned by a solid legal framework. That’s why it’s crucial to work with a corporate lawyer to ensure that a company’s growth is secure, strategic and sustainable over the long term – whether it’s a traditional family business or a modern online business.
Yes, if it’s well thought out. Even a smaller business or family business can expand into online services or new products.
Underestimating the preparation. Without a legal framework, disputes, tax complications or invalid contracts can arise.
The ideal time for diversification is when a company has a stable base, regular customers and spare capacity that can be used elsewhere. For family-owned businesses, this is often the moment when a new generation comes in with new ideas – for example, digitisation or expansion online. Diversification should never just be a reaction to a crisis, but a well-thought-out strategic move.
Yes, the online environment offers countless opportunities for diversification – from selling complementary products to online courses to providing digital services. Many companies are combining traditional business with online sales to expand their revenue and increase accessibility to customers. But here too, legal certainty is needed – for example, in the areas of data protection, copyright or complaints rules.
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Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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