Street Smarts

Of all the challenges people face when they decide to start a business, one of the most difficult is learning to just say no

Contrary to popular myth, entrepreneurs do not enjoy taking risks. Granted, a certain amount of risk is unavoidable in business, but the thrill of the start-up doesn't come from defying the odds. It comes from creating a viable company, and you improve your chances of doing that if you keep the level of risk as low as possible.

Not that minimizing risk is easy, particularly if you're setting out on your first new venture. You're excited, after all. You're impatient. You may be under financial pressure as well. When you come across an opportunity that meets your criteria, you tend to brush aside potential problems, telling yourself that they aren't that serious.

The danger, of course, is that you'll make a bad deal, for which you could pay a high price. It's often said that four out of five new companies fail. I don't know how accurate that figure is, but I have no doubt that the majority of new companies would succeed if people understood the process they needed to go through so that they could recognize a bad deal when they saw one and then say no.

Let me tell you about my friend Bob, who came to me more than a year ago looking for advice. He and his son, Tracy, wanted to go into the self-storage business. I offered to help them.

We began, as always, by talking about their ideas and goals, and I mentioned that we'd have to do a business plan. Bob asked why -- they weren't looking for investors. I told him that, first and foremost, he and Tracy needed one for themselves. It was an indispensable educational tool that would guide them as they researched the business. Beyond that they needed something they could use to evaluate their choices for getting started.

Bob wasn't sure he was capable of writing a business plan. Although he'd owned and operated a transmission shop for more than 20 years, he considered himself a mechanic, not a businessman. I told him he knew more about business than he gave himself credit for.

So I took them through the process. I had them get in touch with the industry association, do research on the competition, talk with other people in the business -- the whole nine yards. I also helped them put together a financial plan, starting with their basic assumptions. How much were they going to pay for a building? What would it cost to get the place ready? How much space would they be able to rent month by month? And so on.

Their initial projections were wildly optimistic, but they got better over time as Bob and Tracy learned more about the business. Little by little the picture came together. They began to see in financial terms exactly what it would take for them to make their new venture successful.

They didn't have much luck in finding a site, however, even though they searched high and low. They must have looked at 20 or 25 possible locations in various towns. They were in touch with eight real estate agents. But, try as they might, Bob and Tracy couldn't come up with a place that met their specifications.

After 10 months, they were growing frustrated. They'd had to take part-time jobs to avoid depleting their start-up capital. I kept asking them if they wanted to look into another type of business, but they said no, they'd stick with self-storage. It was the ideal business for them.

Finally, in October a real estate agent called them about a place that sounded perfect. It was empty, available, and just the right size. Although it hadn't been used for storage, the building was in a good area and could be easily converted. The roof and the parking lot needed to be redone, but the owner had agreed to discount the price of the property by enough to cover the repairs. In any case the total cost was well within the financial range Bob and Tracy had set for acquiring and setting up a facility.

They went to view the site and liked what they saw. I did, too, when we all went back together. There was just one little problem: the place was set back off the main road. Oh, well, Bob and Tracy said, they could put up a big sign on the road. The building itself was pretty much what we'd expected. Other than a few damp spots from the leaking roof, the place looked fine. Bob and Tracy were thrilled.

The next step was to bring in an architect to advise on renovations, check on zoning issues, say what had to be inspected, and so on. After doing some research, he came back with another little problem. The town, it seemed, would permit only a small sign on the main road. Oh, well, Bob and Tracy said, they'd just have to compensate in other ways.

Then another issue cropped up. The financial plan included revenues from outdoor storage of boats, equipment, and the like. It turned out, however, that the town wouldn't allow anything to be stored in the open. Oh, well, Bob and Tracy said, outdoor storage didn't account for a very large percentage of projected sales. Maybe they could make up for the loss.

The process dragged on for a few weeks, and the information dribbled in. That's what always happens. You don't hear about all the problems at once. They appear one at a time, usually separated by a few days' time. In your mind you've already dealt with the first three issues by the time the fourth pops up, so you don't see the cumulative risk.

In this case the fourth problem wasn't so little, although -- by itself -- Bob and Tracy probably could have overcome it. The person we'd hired to inspect the roof found asbestos in it. We brought in an asbestos specialist, who confirmed the problem and gave an estimate on the cost of fixing it -- about $250,000. Bob and Tracy talked to the real estate agent about knocking that amount off the price, but the owner wouldn't budge. He was already paying for a new roof and parking lot. The buyers would have to cover any other expenses themselves.

There comes a point in every deal when you need to lock yourself in a quiet room for an hour and conduct a private review of the facts. You need to write down what you thought were the key elements of the deal before you began to investigate and negotiate. Then you should note every deviation. You should look at all the deviations together and weigh your decision.

I'm not talking here about listing the pros and cons. You don't have to remind yourself of the positives. They're obvious. What you need to focus on are the negatives, bearing in mind that there are always a lot of problems you won't discover until after the deal is done.

Listen, no start-up is a sure thing, but let's say you have an 85% chance of success if you hit the numbers in your business plan. The question is, how close can you get to 85%, given the problems you've discovered during your due diligence? I've made quite a few bad deals over the years, one of which drove my company into Chapter 11. These days I don't go forward with a deal unless I'm convinced that the known negatives don't outnumber the unknown ones I expect to run into later on.

To be sure, weighing risk is ultimately a judgment call. Bob and Tracy had to make up their own minds. I just wanted them to see the issues clearly. We sat down together and went through the review process. I had them lay out their initial expectations as well as all the deviations we'd discovered. "So what do you think?" Bob asked.

"It's your money," I said. "You and Tracy should talk it over and decide."

The next day he got back to me. "This is not right for us, is it?" he said.

"No, Bob," I said, "I don't think it is."

I know that he and Tracy were disappointed. Those decisions are always tough. You naturally tend to focus on what might have been, and so you feel a sense of loss. You don't think about all the aggravation and heartache you're avoiding, and you don't see the new opportunities that lie ahead.

But someday you'll look back and realize how right you were to follow your instincts rather than your emotions. I'm sure Bob and Tracy will. They did a lot of soul-searching after the deal fell apart and concluded that they had to expand their horizons. The self-storage business was getting saturated, and real estate was getting too expensive.

So now we're looking at a range of new possibilities, and at least one of them appears far more promising than self-storage ever did. My guess is that Bob and Tracy will be in business before summer.

Norm Brodsky is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available at /columns/streetsmarts.