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Sep 27Mike Rodems

Entrepreneurship – Is it worth the risk?

Sep 27Mike Rodems
Business Display Of Profit And Other Words

Most definitions of an entrepreneur contain the word risk. They typically will state that an entrepreneur assumes the risk of a business venture. This does not necessarily mean that the types of business ventures entrepreneurs undertake on are considered to be risky. Entrepreneurs are simply taking responsibility for the success or failure of THEIR venture. With this responsibility comes the possibility of reward, and of course there is also the risk of failure.

The rewards can sometimes be substantial. The possibility of doing what you choose to do for a living can be rewarding. The satisfaction of accomplishing something mostly on your own can also be rewarding. Controlling your own destiny is also a satisfying and comforting feeling. You know that if you work harder, you will reap the benefit of your labor, and conversely if you slack off, you have no one else to blame but yourself.

If you can make a comfortable living as an entrepreneur, you may also be rewarded when you decide to retire, if you have created enterprise value that another entrepreneur or possibly a larger entity may want to purchase. This is the second payday that many entrepreneurs don’t necessarily plan for, but in some cases can be quite a nice benefit.

Typically the value of a business run by an entrepreneur is the entrepreneur himself/herself. When the entrepreneur sells his/her business and leaves it to be run by a new owner, typically the enterprise value of the business decreases significantly. An entrepreneurial enterprise that has developed goodwill that is separate from the entrepreneur may develop intrinsic value that the entrepreneur may be able to sell to a third party.

Entrepreneurs are not typically known for their implementation of strategic planning techniques, especially if it involves long-term value and the generation of developing enterprise goodwill. Many entrepreneurs are generally categorized as day to day managers of a small operation that barely provides a decent living. The exception to the stereotypical entrepreneur might be the business genius that can see an opportunity through to its second payday. The second payday is what is received when the business is ultimately sold. Sometimes this payday will exceed the sum of all regular paydays – the amount an entrepreneur is able to take out of the business while working it.

Steve Jobs, Bill Gates, Mark Zuckerberg and others that took risks early and developed enterprise goodwill along the way may be the best examples of genius entrepreneurs. They most likely were able to see early on that if they developed the entrepreneurial strategy of creating enterprise goodwill, and maintained it throughout the life of a business enterprise, incredible value could be created and retained. They are among the best at creating a second payday. Their value of the company, or more specifically the portion that the entrepreneur retains and is able to sell upon retirement, may far exceed the paychecks that they collected along the way.

Most entrepreneurs will not have the same level of success in building enterprise goodwill. This may be due to the business itself, how it was managed, market conditions, the business climate as well as the entrepreneur’s goals.  If the goal is to maximize the first payday, it might be at the expense of the second payday. Stated another way, the less that is reinvested in the business, the less likely the entrepreneur is to have a second payday. Another element is the amount of risk the entrepreneur is willing or able to take on. If more time or capital is invested, there is a greater the chance that there will be a second payday. Additional risk may be taken on in the form of borrowing capital and investing it in the growth of the business.

Another entrepreneurial strategy that will enhance goodwill and enterprise value is the development of a strong management team. The entrepreneur needs to train a management team to carry on and manage the business after he/she has left, so that the business can be run effectively without the need for the entrepreneur to be there. New owners typically are very concerned with the quality and talent of an existing management team when evaluating the acquisition of a new business. If an enterprise comes with a good management team, the enterprise is worth more to the new owner.

Finally, intellectual property, patents, trademarks, trade secrets, brand names, manufacturing processes, equipment, business location, and other more material aspects of a business can create value that can be transferred from the entrepreneur to a new owner. The entrepreneur needs to try to accumulate assets such as these in order to add value to the enterprise itself.

In summary, an entrepreneur needs to establish his/her goals and then develop a strategy in how to run the enterprise so that the entrepreneur’s goals are accomplished. The goal of achieving a second payday should always be kept in sight. Too often we don’t look far enough ahead to be able to steer where we ultimately want to go.

photo credit: Art Easel Profit Loss Risk via photopin (license)

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