The risks and rewards of small business

There’s no such thing as a sure thing in business. You will always, always face risk.

$100 dollar bill in fight ringBut there are different levels of risk, depending on the type of venture you choose. If you are considering starting a business, buying an existing business or becoming a franchisee, it is essential you assess your own tolerance for risk first.

The good news is that while all businesses have risk, they also come with opportunity.

Let’s look at the wide expanse of entrepreneurial risk and reward and see where you might fit on the risky business scale.

Start your own business
For those most tolerant of the unknown, a startup might be the perfect fit. It also helps if the founder is a bit of a visionary. This type of entrepreneur can identify a problem and develop a new solution, coming up with a better way to do something. This person typically is willing to go against the grain and is comfortable working alone or in a small team.

Startup entrepreneurs also tend to be excitement junkies. They are focused, determined and willing to go through, under or around any business adversity. These folks have guts, nerve, grit and — hopefully — relatively deep pockets. Money is hard to get when you’re a young business without a track record.

The great thing about starting a business is that you gain skills you can then apply to starting other firms. Many existing companies use this startup mindset to launch new services and new products.

Buy an existing business
If you’re seeking a little more security, there are a lot of benefits to buying an existing business with existing customers, existing staff and an existing system for generating revenue. Someone else has already set up your payroll and found a building. Plus an existing business has a track record of sales, income and cash flow, which might make it easier to borrow money from the bank.

You also have the freedom to make changes to that business. You can tweak details, clean up operations and run things better.

One word of advice: The more you know the business sector you’re buying into, the better deal you will strike with the previous owner. There’s less chance for risky surprises.

Once you buy one business, you might decide to buy others — a powerful way to achieve economies of scale and grow faster. Mergers and acquisitions are an effective strategy for corporations. Why shouldn’t you take advantage of this strategy, too?

Become a franchisee
Some entrepreneurs might not feel comfortable launching a startup or buying an existing business. These people might be better off buying into an existing franchise.

The franchise model is not as sexy, glamorous or cool, but it is entrepreneurial just the same. And because of the support of the franchisor, it is potentially less risky.

This support may come in the form of a time-tested business model and training. Since most elements of franchising are prepackaged and prescribed, this type of entrepreneurship requires less owner personalization. Franchisees may be told how to set up their operations and may be given essential technology and marketing tools.

Sometimes loans are available from the franchisor, but there are also franchise and marketing fees. Most franchisees also pay continuing royalties — a percentage of sales — to the franchisor.

Franchises come with numerous opportunities for growth. You could open multiple units in your region or in other territories, or you could become a franchisee for multiple brands. Who knows? You could even dream up your own concept and become a franchisor.

What’s next?
One suggestion is try a business on for size by getting a job or volunteering in the industry that interests you.

Kansas City is home to several resources that offer free or low-cost coaching and training for new and aspiring business owners. The Small Business & Technology Development Center at the University of Missouri-Kansas City and the Kansas Small Business Development Center at Johnson County Community College are great places to start.

Richard Wood, UMKC SBTDC

Richard Wood, business development consultant, UMKC SBTDC

Entrepreneurship is exciting and dynamic, but it also can be turbulent and chaotic. One way to control and balance these conflicting elements is to manage risk up front before you invest in a concept. Successful entrepreneurs already know the worst that can happen before they begin their enterprise.

Do your homework! Understand yourself and your tolerance for risk. That way, you’ll be ready to make the most of your opportunities.

– Contributed by Richard Wood, business development consultant, University of Missouri-Kansas City Small Business & Technology Development Center, which offers coaching and training to new and established business owners. Email: woodri@umkc.edu or info.umkc.edu/sbtdc