Risk and reward in business (and some thoughts on finding the balance)

risk and reward

A few hours ago, we ran into a snag with the launch in less than three weeks of Ontario Construction News as a daily electronic newspaper. The person we had arranged to contract as our editor bailed, saying he couldn’t take the risk of a part-time initial assignment because he would have to forgo current clients, and he wasn’t ready to risk losing that business for an uncertain potential opportunity.

My reaction: An initial sinking feeling, then a counter-proposal that would reduce his risk threshold (but not increase company obligations and artificial commitments), and then, a decision to take measures to provide back-up coverage in case the decision to leave the project is final.

On a deeper level, however, I appreciated the dynamics of risk in entrepreneurship, marketing, and business operations and respected his decision because through my entire business life I’ve been truly careful and cautious about managing the risk profile.

This morning, for example, I visited the bank to do something I have never done in my history of publishing (and that goes back 30 years). I transferred several tens of thousands of dollars of personal money into two business bank accounts to totally pay down two credit lines. In a couple of weeks, I’ll do a similar thing and pay off the company’s credit card. Overall, I’m coughing up about $80,000 to pay down the business debts.

There’s a reason for this process — it is to clean up the business and resolve more than $150,000 in unpaid (and totally unsecured) trade debt to our former printer — dating back to a business crisis back in 2003-2005. At the time, the printer said he could live with the debt as long as I kept balances current and worked to pay them down. We didn’t succeed in reducing the debt, but still funded more than $1 million in printing services over the next decade.

But we don’t print any more. In fact, we stopped printing and switched to an e-publishing format about three years ago, when the business faced another crisis — losses that would quickly require additional credit lines, personal investments or other cash-draining resources if I didn’t take immediate action. I did.

But there still was the outstanding debt — and when the printers asked nicely but firmly to be repaid, I offered a choice: We could push the businesses into bankruptcy protection and because the bank would be paid regardless, the printers would get nothing. Or I would pay 10 cents on the dollar to clear the debt — about the same amount it would cost me to pay a bankruptcy trustee for its service.

The printers accepted the deal, but only after asking me to figure out a way around potentially difficult legal issues involving creditor preference rules. Fortunately, I’ve worked with a very good lawyer since the business start-up, and he suggested a solution that involved escrow funds and me paying off the bank in full before releasing the 10 per cent to the printer.

So today, I completed the arrangements.

When I left the bank, I sat down for a coffee and was greeted by an old friend, who unlike me had worked his entire career as a federal civil servant and now is retired with a healthy pension. He’s doing well, with voluntary service and home renovations to keep him occupied, but even though our ages are similar, I’m certainly in a very different space — with a new business start-up just a few weeks away.

But what about that risk? Well, yes, in 30 years in business I managed to run up a debt of $80,000 that needed to be repaid. It isn’t a tiny amount but it certainly doesn’t impact my net worth too much. It doesn’t fit the stories of others who have lost their homes, or ended up truly bankrupt because they personally guaranteed large debts on their bright ideas.

And that start-up . . . we indeed are doing it on a shoestring, just the way I’ve always done things, at least as closely as possible to my model — which is to validate the market BEFORE putting real money into the process.

With the new daily publication it is hard to validate the market with my preferred methodology — with pre-sales and cash-up-front payments — because the advertisers for this specialized legal product only will buy the ads when they need them, and their advertising purchase is extremely time-sensitive. However, conversely, I have rather exact numbers about the market, knowledge of how it operates, and extremely conservative market share expectations.

This means that, operationally, we expect to be able to pay a truly competitive salary (with benefits) to the qualified writer/journalist. But it seems folly to commit that type of money at the outset — surely we can get by with part-time editorial support, allowing that I’m a qualified journalist/writer and don’t mind working extra hard for a few weeks while we are launching the product.

I realize not everyone’s risk tolerance is the same, and could see the reasoning behind the freelance writer fearing he would be giving up permanent clients for an iffy opportunity. My proposal that he take on the assignment with us for a very short time as we prove out the market, might work — but I’ll seek out other journalists/writers on short notice to ensure we aren’t left in the lurch.

Things are clearly getting intense as deadlines approach.

Would I trade my life for the retired civil servant? Not a chance, even though his net worth and family life are probably quite close to mine in quality. I enjoy the adrenaline rush of creating and running a business, and feel refreshed by the start-up challenge.

But equally, I’m thankful that I always have set rules regarding business risk, debt and investment. If the debt is in any way personally guaranteed, it must never be so high that I would jeopardize my life if somehow it needed to be “called” and, as much as possible, I endeavour to align expenses and income to prevent losses. And in line with these values, I seek to start a business with as little capital risk as possible. This allows me to sleep well at night even as I have fun dealing with the real challenges and instability in turning an idea into a reality.

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