Select a Business

Tips for Minimizing Risk

You should carefully weigh the following criteria to minimize your risk when selecting a business:

Passion.

Make sure you are passionate about the industry in which the business operates. If you are, it’s more likely you will work longer and harder, which helps ensure success and minimizes the chance of failure.

Suppose you are considering a business in the fitness industry versus one in the hospitality industry, and you are a former competitive athlete. In that case, it’s more likely you will be successful in the fitness industry, assuming you are still passionate about it. If, on the other hand, you like throwing a good party instead of a football, you could make your mark in the hospitality industry.

Related Knowledge.

If you have related industry knowledge, your learning curve in a new business won’t be as steep, and you can use your expertise to your advantage. But, your knowledge can become a handicap if you aren’t willing to delegate. You may find yourself focusing on areas of the business that don’t make the business successful.

Use your knowledge to focus on areas where you provide the most significant value, such as sales or marketing, and be willing to delegate routine tasks that can be easily performed by employees and that provide less contribution to the overall success of the business.

Relevant Skills.

Some skills are transferable to other industries, and some are not. With a slight learning curve, you can apply many skills from one industry to another. Try to choose a business where you can leverage your existing skills instead of an industry in which you have to acquire all new skills from scratch.

You should also focus on performing tasks that are difficult to hire for and that are revenue-generating, such as sales and marketing.

For example, being skilled at networking and building alliances with CEOs are skills that apply in every industry. However, skills such as bookkeeping or accounting are affordable to outsource if you aren’t experienced in them.

Revenue-generating skills are in high demand and come at high costs — generally, these are skills related to sales, marketing, or networking. You are more likely to be successful in a business where you have — and love performing — the skills that directly contribute to the business’s success.

Financial Cushion:

It’s wise to maintain a moderate financial cushion in the event of a downturn. This includes both emergency funds and a strong debt-coverage ratio.

A strong debt-coverage ratio varies, but the wider the gap between the business’s monthly cash flow and your debt payments, the more likely you will be able to cover the business debts. If your payments are $50,000 per month, a cash flow of $60,000 per month doesn’t leave you with much cushion if things go wrong. On the other hand, if your payments are $30,000 per month and the business generates $90,000 per month in cash flow, your debt coverage ratio (3.0) is much more likely to shield you in a downturn.

Risk and Opportunity Co-Exist

If you eliminate risk, you eliminate opportunity since the two always co-exist.

Mitigating Risk

Your goal as a business owner is to mitigate risk, not to completely eliminate it. If you prioritize “security,” you may sacrifice the freedom and opportunity that comes with becoming an entrepreneur. Being an entrepreneur is inherently risky — you must be prepared to accept uncertainty or you should not become an entrepreneur.

First-Time vs. Experienced Owners

First-time business owners may be more averse to risk than experienced business owners. Experienced entrepreneurs may be more accustomed to making decisions based on “gut feelings” or acting on incomplete information. There is no perfect business; as a business owner, you must learn to embrace both the opportunities and the risks.

Facing Fears, Taking Risks

Buying a business is accompanied by an unavoidable degree of risk and, therefore, trepidation. Some prospective buyers are willing to face their fears and make an offer despite the presence of risk. Others become immobilized and do nothing.

Face Fears Head-On

To own a business, you must face your fears head-on. Fear is the biggest obstacle faced by would-be entrepreneurs.

A successful entrepreneur must learn to deal with uncertainty and make judgments based on incomplete information. Entrepreneurship is not about eliminating risk but rather learning how to face and manage risk — this includes learning to make decisions based on limited information.

At some point, the time and energy you spend searching for a business or conducting due diligence provides you with diminishing returns. After all, the resources spent looking for the “perfect” business could be used to improve an “imperfect” business.

Lost Opportunity Cost

Consider your “lost opportunity cost.” What is the cost of delaying your decision by one year? Your decision to buy a business is reversible, and you can sell that business if you determine it isn’t an ideal fit. If you maintain the business’s revenue and profitability, you are unlikely to experience a substantial loss.

Alternatively, you could briefly operate the business, increasing revenue and profitability, and experience a gain when you sell it. You might buy a business, run it, then sell it for a profit in the same amount of time it takes another buyer to “watch the market” and “plan the perfect time to jump.”

If you become immobilized by your fears while searching for a business and hesitate to make decisions within a reasonable time frame, you may struggle as an entrepreneur — not to mention risk losing the company that caught your eye in the first place.

Entrepreneurship Is a Journey, Not a Destination

Some people attempt entrepreneurship and ultimately determine it is not suitable for them. Your journey through entrepreneurship allows you to learn and grow, and the sooner you begin, the sooner you can decide if entrepreneurship is for you.

Discover Yourself

Being a successful entrepreneur is not solely about outcomes. It can also be about discovering who you can be. A major benefit from buying a business, even if you ultimately decide entrepreneurship isn’t for you, is that you won’t suffer regret from wondering what “might have been.” You took a chance, learned something valuable, and can choose to return to your previous career.

Learning From Leaders

“Good judgment comes from experience; experience comes from bad judgment.” — Anonymous

Learning from Experience

The biographies of successful entrepreneurs illustrate a typical pattern. Often, they experience a winding, stop-and-go roller coaster ride to success, filled with ups, downs, derailments, and everything in between. But the pattern of these entrepreneurs moves upwards over time. It may not be a straight shot up, but the trend will be similar to a chart of the stock market’s performance over time — lots of peaks and valleys with an upward trend over the long term.

Learning from Mistakes

Entrepreneurs learn from their mistakes and become more savvy as a result. Their outcomes improve, and they emerge as more successful entrepreneurs. This knowledge builds cumulatively until the entrepreneur reaches peak effectiveness and goals are accomplished with less effort.

Everyone makes mistakes on their path to success. The key is to learn from them and start smarter and stronger after each miscalculation. Over time, your skills as an entrepreneur will improve. This judgment can only be learned through experience.

Learning from Leaders

The lives of some of the most successful entrepreneurs demonstrate this point. We recommend reading biographies or autobiographies about the successful people below. You will notice a common pattern on the road to success marked by unpredictable peaks and valleys. The road to success is never smooth.

• John D. Rockefeller (dropped out of high school before becoming the world’s first billionaire)
• Warren Buffett (the world’s most successful investor’s holding company, Berkshire Hathaway, started out under Buffett’s ownership as a failing textile company)
• Sam Walton (founded Wal-Mart after losing the lease on his Ben Franklin store)
• Oprah Winfrey (attributes her success to lessons learned from an early life of abuse and traumas)
• Ray Kroc (didn’t hit it big with McDonald’s until he was in his early 50s)
• Bill Gates (says his failure to develop Apple competitor Android cost Microsoft $400 billion)
• Jack Welch (grew GE into a $594 billion company by 2000, but failed to see the enormous potential of high tech until it was too late)

“I’ve learned that mistakes can often be as good a teacher as success.” — Jack Welch