Mind the gap

Let's imagine that your a small business owner running a cafe. Your business is in a decent location surrounded by plenty of high density housing. You're confident that the venture has a strong potential for customers and, more importantly, making a profit. Apart from furnishing the cafe and organising a bank loan, you out-laid a decent amount of start-up capital to acquire various Council licenses (e.g. to sell food and drink). The licences are expensive but, hey, that's the cost of doing business, it will be a 'license to print money' when the business gets going.

Now look forward a few years into the operation. The cafe is set up 'just so', costs are under control, and, you hope to finally start making a positive return on your investment.

Then, out of the blue, the Council notifies that it's going to retract your license. Suffice to say you're not happy with the decision. So, you look at your balance sheet to see where the finances are at. Oh dear. It's not a pretty site. Revenue is decent but you're still in early years of your business plan and quite a long way behind recovering total costs. Also, local suppliers have heard you're going to be shut-down. Understandably they aren't so keen to do business with you anymore as you're seen as a credit risk. You would love to lodge an appeal in the Courts but, even if you could build an argument that would mean taking on more costs that you just can't afford. Against this backdrop you're left with little option but to cut your losses and shut up shop.

However, the Council wants to force you to stay open. It says you've got a responsibility to your customers to stay open until the very last day.

Hard to see the logic?  Incredibly this is the situation faced by some of India's mobile operators as the Regulator has told them that according to the fine print in their license conditions they are obligated  to continue offering services despite such licenses being retracted.

Is this a risk that the operators should have considered? The Regulator is correct that the license conditions did include such a clause and the operators agreed to it....But in that jurisdiction what was the likelihood that the situation would change? Are there any right of review processes? How flexible was the business plan to shocks?

The key with risk is that it's impossible to mitigate from a position of ignorance. Yet, unfortunately, regulatory risk is a variable that far too frequently is under-estimated or, worse, completely over-looked. We spend our entire lives managing risk - we look before crossing a road, pack an umbrella at the site of clouds, purchase travel insurance before a holiday. Businesses should treat regulatory risk no differently.