The Perception Of Risk Lloyd Shears The things we do daily, and routinely, we do without much thought of the risk involved. Many of us get on airplanes regularly. What's the worst thing that could happen to us when we get on a plane? It could crash and kill us! Yet, we do it. Why? The perception is that it is not going to happen to us. So, what are the risks in buying a business? Well, it's certainly not as risky as getting on a plane. After all, a business will not kill you, and a plane could. Therefore, the decision to get on a plane must be a much more difficult one than buying a business, right? Perhaps not! We perceive the plan as being safe because everyone we know is doing it. Everyone we know is not buying their own business. Frequently, when I do educational seminars for groups on buying a franchise, I ask the question "Would you jump off a roof if I asked you to?" Almost without exception, I get laughs, people shaking their heads and a pretty resounding "NO" from the audience. Rarely does anyone question me on how high the building is. You see, the building could be an inch high or 45 floors! The decision to jump or not could be very different based on this information. Most people also perceive business ownership to be risky, and expensive, and never gather the facts. My favourite cartoon of all time features two men at a building construction site wearing hard hats. They are sitting on an iron beam, dangling over the city, eating lunch. (Just the thought of the risk taking strikes terror in my heart). The caption below the cartoon has one man saying to the other "Sure I would like to own my own business, but I think it's too risky." They risk their lives every day at work. It just does not seem risky to them. Clients often tell me they have decided to buy a franchise, as opposed to staring their own business, because they perceive it as less risky. And of course, all the statistics bear this out to be true. On average, a franchise is far safer than an independent business. This is a well-established fact. However, to perceive all franchises as being equal would be a mistake. A company in business 20 years with 300 franchises in operation is bound to be a safer investment than a company that went into business last December with three franchises. Just as a surgeon is more skilled after 20 years in the profession than they were in medical school, so does a franchisor learn their business as they expand. It's not unusual to be meeting with groups of people at career counselling centres who are at a crossroad in their life. Having been given the golden handshake by a company, and debating whether this is the time to go into business for themselves or not, risk and perception comes into focus. Either route has risk involved. Having just lost a job, these people certainly do not se a job as safe. What about a business? In a job, the risk is delayed … backloaded if you will. There is no monetary investment to go into the job, however, the longer you are there the greater are your chances of being given another golden handshake. The business is front loaded with risk. You put your investments in the beginning, and take the bigger risk. As the business grows over time, the risk decreases. Working hard for yourself grows an asset. Working hard for an employer is no guarantee that you will have a job and paycheck in the future. While most clients come to see me for assistance in finding a franchise, I also have clients who want my help researching a company. Let me share with you a recent experience. Outplaced from a "Fortune 500" company after 20 years, Brian had no intentions of looking for another job. Along with a financial partner, Peter, he was determined to have his own business, and had decided to buy a franchise. The partners came to see me for some input on the particular food franchise they were planning to buy. We met in the boardroom, so as to have access to a whiteboard, on which to detail what they wanted from a business. Both had similar desires. Brian was interested in security for himself and his family, and was also interested in time for his leisure pursuits. Peter, while also interested in, as he put it, "having a life", had a high interest in making money. Ideally, they told me the business had to return $250,000 annually, to reach their financial goals in 5 years. The two men had combined assets of $400,000 and were looking at investing $160,000 in this business. Quite honestly, the discussion never did get around to the quality of the franchisor. Viewing their goals in black and white, both men were horrified at how closely they had come to making a terrible mistake. The business was open 16 hours a day, and 7 days a week. So much for the important leisure time. To make the desired income they would need to own 5 units, an $800,000 investment and possibly more, when they factored in the need for management. Clearly, with their assets, and aversion to risk, this was not going to be possible. Presently, they are reviewing a service business, where the initial investment is lower, at about $30,000. The hours are regular … Monday to Friday, 9 to 5. It is inexpensive to expand, as additional franchises will cost $12,000. There will be no lease on a storefront to sign, staff will be hired as needed, no expensive leaseholds, and huge profit margins. The income they want to achieve can be reached without exposing all their assets to risk. Their perception of the first business as taking them to their goals could not have been further from reality. Let me challenge one more "perception of risk" trap which we fall into, and that is "return on investment". Few of us have not heard that "it takes money to make money". Translated, it will take money to go into business. However, the amount you are going to make in the business will not necessarily be dictated by the amount you invest. We are not necessarily getting a better business, or one which is going to make more money, because we have invested a lot. It would be convenient if that were true, but is just isn't. Look at the above scenario. These people are looking at a $30,000 business, which could make a superior return, have better hours, and is easier to expand than a $160,000 business. Most of us are out to avoid risk. To avoid risk, we need to understand what is perception, and what is fact. Going back to the earlier paragraph, where we spoke about jumping off the roof. None of us are going to jump if it is too high. However, to be sure we are doing the right thing, perhaps we owe it to ourselves to go to the edge of the building and look over. Make our decision based on fact. From a distance the height might be deceiving. So to with deciding on business ownership. If you simply "think" a business is too risky, you could be shortchanging yourself. On the other hand, you might be right. You owe it to yourself to do a little research, and have a good look at a few businesses. It is OK to look at a business and say "Yes" and it is OK to say "No". Just make the decision based on fact, not perception. Know what your goal is in buying the business. Financial, family, community, may all form a part of your criteria. Then, carefully analyze the business to make sure it will give you what you want. In fact, think of it this way. The business we buy is the vehicle to get us to our goal. If we want to go to Miami on a vacation, we get on a plane going to Miami. A plane going to Boston does not get us to our destination. Buy the business that will take you to your destination. Investing, or not investing, in a business is a big decision. Make sure your family is part of the decision, and is supportive. Do your research, and ask every possible question. In the next edition of Canadian Business Franchise, we will be doing a detailed article on "Researching a Franchise". Published: Canadian Business Franchise L'Entreprise Volume 3, No.