Take the Right Risk
Not long ago, I heard about a body shop for sale in a new growth area just north of San Diego. I had read that there were 5,000 permits for building new homes there. And now, with the recession, many of those new homeowners have received foreclosure notices. The body shop for sale was a second location of a business that was thriving at the peak of the region’s growth.
The sale price? $100,000—less than the cost of the frame machine and spray booth alone. That’s a great deal, but only if the economy bounces back, and brings new homeowners with it. Sounds pretty risky.
If you’ve been in business on your own for a while, you’re no stranger to risk. I’ve been in business for myself more than half of my life. Many of us financed cars, houses, boats and whatever else we could scrape up to get started. We learned early on what risk is all about.
If you’re still in business, then your risks—or at least most of them—have paid off. You’re the exception. Of those who take the risk to start their own business, 80 to 90 percent don’t make it. Chances are, many of them went back to a job and never considered taking that kind of risk again.
RISK OR GAMBLE?
Economist and investment consultant Peter L. Bernstein, who died this summer, wrote Against the Gods: The Remarkable Story of Risk (Wiley, 1996), perhaps the definitive book on risk and the gradual development of the concept of probability and odds. He points out that the basis of risk is uncertainty.
When the outcome of an action is 100 percent certain, there is no risk. From there on down, one’s willingness to risk depends on how much loss he or she can tolerate. If there is an 80 percent chance of winning, there is still a 20 percent chance of losing.
Inc. magazine provides risk simulations at inc.com/keyword/risk, along with advice on dealing with uncertainty. Gaining four types of knowledge, the editors suggest, can increase one’s odds of risking wisely:
• Knowledge of one’s own personal biases and how they might influence judgment.
• Knowing the statistical probability of success and the magnitude of possible failure.
• Knowing the viewpoints of all of the major experts in the field.
• Knowing if your company has a particular weakness that might sabotage the venture.
Given the current environment of fraud, lies and blatant dishonesty, there is a fifth area of concern: credibility. After the Enron and Global Crossing fiascoes, followed by the Madoff Ponzi scheme, can the information on which you are considering taking a risk be trusted? In other words, when you see that a complete body shop is for sale for $100,000, you ought to wonder, “What’s the catch?”
USING THE FORCE OF RISK TO GROW
There is always a measure of discomfort in risking. Any venture can result in either a gain or a loss, and it’s impossible to know in advance which it will be. In business, we give up some money in the hope of making more, or we risk some of our time reaching out in the hope that we will bring in more business.
Since you’ve been in business for a while, you may have become “comfortable” with a certain level of risk. The risks a businessperson must take can change from day to day. Failing to take the right risks can mean losing out on potential new business. Becoming too comfortable can relax an entrepreneur into a false sense of security.
And that’s a great danger in business: Flying on automatic is like coasting. Gravity takes hold, starts you into a decline and eventually brings you down. To keep growing, and sometimes—as when in a sluggish economy—just to stay even, regardless of the possible downside, it’s necessary to take new risks. The right risks give you a chance to move up and bet more on your ability to create more and better business.
Tom Franklin, author of Strategies for Greater Body Shop Growth, has been a sales and marketing consultant for more than 40 years.