How to Become Risk Savvy

Sure, starting and running a business comes with risks. But a savvy entrepreneur knows how to minimize them by taking calculated risks instead of crazy ones.

Although I was by no means the world’s greatest law student, the fact that I could write well, was older than most of my classmates, and had some real-world experience landed me one of the best jobs of anyone in my class upon graduation: working at the big firm in the big city while making the big bucks.

But that dream job soon turned sour when it dawned on me that they weren’t paying me that sweet salary for nothing. The hours were grueling and the work demanding. Before long, I was dreaming about leaving that “dream job” and starting my own law practice.

But doing that was easier said than done. As anyone who has ever contemplated starting a business knows, the risks of the venture loom large. How does one leave the security of a job and paycheck and benefits for the uncertainty of a new business? The potential perils seemed too big. And then I remembered the words a wise old entrepreneur once told me:

“An entrepreneur is a person willing to take a risk with money to make money.”

Right he was — risk is part of the game. There was no way around it. Trying new ideas, opening a new location, launching a new product line — it all involves risk. So maybe the first question to ask yourself if you are thinking about starting a business is whether risk-taking is part of your DNA. Because if it is not, you will have a problem from the get-go.

That said, it’s equally true that the best entrepreneurs are risk savvy. They know that, while taking risks is inevitable, they should never be wild, crazy risks. Instead, one trait shared by great entrepreneurs is that they look to make their risks smart, calculated ones.

Risks: The good, the bad and the gut-wrenching

How can you tell the difference? After all, with great risks come great rewards, and as such, it’s sometimes hard to see the forest for the trees.

One way is viscerally — you know a big risk when you see one. It registers in your gut. In his great book “Blink,” Malcolm Gladwell posits that gut reactions are often the best reactions because your subconscious takes in all available information and registers very reliable instant responses. In other words, if you find yourself waking up in the middle of the night worried about X, it just may be true that X is the sort of risk you will want to avoid in the future.

That said, and with all due respect to Gladwell, risk-savvy entrepreneurs also use their left brain as much as their right. Gut reactions are good and all, but they cannot substitute for some old-fashioned, logical analysis.

When analyzing a business risk, consider:

- The upside potential. You are taking a risk to get ahead, so you need to begin with what can go right if it works. The problem here is that this is too often where the analysis stops because the perceived results are so darned enticing that people experience brain freeze. Don’t make that mistake.

- The worst-case scenario. One way risk-savvy entrepreneurs become risk savvy is by making mistakes. Mistakes will happen in your business, too — guaranteed. And given that, it’s your job to make sure that no single mistake will cripple your business.

Mistakes happen. The worst-case scenario happens. No one at Time Warner or AOL ever expected their merger would later be considered the worst in history — but it was, and it almost destroyed both businesses in the process.

If the risk is such that, should it fail, you will still be OK (albeit damaged), then you’re good to go. But if the downside possibility would be crippling, it’s not worth it. Period.

The last part of the equation for becoming risk savvy is that before ever taking any risks, smart entrepreneurs put in place mechanisms to make sure their exposure is never too great. That’s what you should do, too.

These include:

- Insurance. What’s the point of insurance? It’s to reduce your risk. Not being properly insured is business malpractice.

- Incorporation. It almost goes without saying, but any small-business person who wants to be risk savvy will have incorporated his or her business. The corporate shield protects your personal assets from business risks and mistakes.

- Written contracts. People remember things differently. People don’t remember things at all. People remember things incorrectly on purpose. A written contract is your protection against all of these unenviable incidents.

So yes, while risks are part of business, the savvy small-business owner will work to minimize them.

Steve Strauss is a lawyer, author and speaker who specializes in small business and entrepreneurship. He also writes a weekly column for USA Today.

© Business on Main. Sign up for our Main Street Authority newsletter to get articles like this delivered monthly to your inbox.