Risks of Entrepreneurship
Being An Entrepreneur Is Not About Risk-Taking
A ton of articles have been written about the “Risks of Entrepreneurship.” For example, go to Entrepreneur.com and type “risk” in the search box and you’ll see. They say that “Risk-taking is almost synonymous with entrepreneurship.” It’s as if entrepreneurs are expected to be gamblers! But nothing could be farther from the truth. Entrepreneurs take measured and controlled risks, similar to the risk that an employee takes when trusting that his employer will always be in business and keep him on the payroll. Read on to learn about some of the risks entrepreneurs take, and how to mitigate those risks.
Risks of entrepreneurship come in two flavors: Market risk, and deal risk. Consider these separately.
The Market Risks of Entrepreneurship
Will your product or service be accepted by a large enough market to make your endeavor worthwhile? If you are inventing a brand new product, this is a serious question, and a real risk. This risk is so common among tech startups that there is a well-established methodology for mitigating this risk. It’s called the Lean Startup.
But what if you are not inventing a new product? What if you are entering a market that already has a proven track record? Maybe you are even buying an existing business. In these cases, you can do market analysis to determine the size of your potential market, and you can brainstorm ideas to increase your potential market. The fact is that for the vast majority of new businesses, market risk can be easily understood and mitigated.
The Deal Risks of Entrepreneurship
The deal risks are more nebulous and harder to understand, but they are not necessarily harder to mitigate than market risks. You just need to know where the deal risks lie, and you need to know some common (or creative) ways to handle them.
An example of a deal risk occurs when you must borrow money to make the deal happen, and the lender requires you to sign a personal guaranty on the loan. You’d prefer that the company you are starting or buying bear all the risk of default on loan repayment, but a cautious lender needs to know they can come after your personal assets if the company implodes. You may or may not want to accept a personal guaranty. And even if you do accept some form of personal guaranty, there are ways to limit your personal exposure. You must be in a position to negotiate, find alternative routes to the deal, or walk away.
In the case of buying a company, a bank may be willing to lend you 80% of the value of the company, but is likely to require that you to pledge your house against the loan. An alternative route might be seller-financing. Sellers are very often willing to get paid over time, but they might require a higher interest rate or a different kind of collateral, namely that you give the company back to the seller if you miss payment(s). You can often negotiate with the seller over the terms of that loan, but of course you must be a reasonably good negotiator, and you must deal with the seller’s lawyer, who has probably done many deals like this and knows ways to help the seller immensely.
If you are the seller in the deal, you have a different perspective. Entrepreneurs are always in the market to sell their companies…for the right price. But not all buyers are equal, and you might risk a lot if you do seller financing, unless you know how to structure a deal that is fair (gives the buyer a chance to succeed) and still protects your interest.
Borrowing risk is just one of many deal risks. Other risks include partnership risks, employee risks, tax inefficiency risk, tenant risk (for landlords) and customer disloyalty risks in general, legal compliance risks, and many others.
Of all these risks, the one we see the most often having the biggest negative impact on a business is partnership risk. The vast majority of entrepreneurial endeavors require you to enter into business relationships with other persons or entities. It might be a key employee, an equity partner, a landlord, a supplier or independent contractor, or an independent company that you intend to co-venture with. The way to mitigate the risks of those relationships going bad is to document every aspect of the relationship. The mere act of negotiating and writing out a detailed contract will tell you whether the person on the other side is worth your time and effort. When you are done negotiating the detailed contract, you will have a business plan for your future interaction, and a path to take if everything falls apart.
Being an entrepreneur does involve taking some risks, but I argue that entrepreneurs are better situated to manage risks than employees are–as long as the entrepreneurs get the right guidance while they are making the deal. In fact most entrepreneurs learn to enjoy finding a safe path through the risks of every deal. So don’t let the risks of entrepreneurship keep you from starting or expanding your own company. Call up your advisors (CPA, banker, lawyer, life coach or business coach) and tell them what you are thinking of doing. The more you talk through it the more possible it will become.
Entrepreneurs are going to save the world, and Argent Place® Law wants to help. Whether you are ready to start your own company now, or you are expanding your business, or you’re getting ready to sell your business, Argent Place Law can help. Think how great it will be to have a lawyer with entrepreneurial experience on your speed dial whom you can call up and say, “I want to start a new company to deliver the best damn widget the world has ever seen! What do I do next?” Schedule an appointment, or just call Argent Place Law to find out: 703-539-2518.