Are You Taking a Risk by Not Owning Your Own Business?

Here's and interesting sidebar from the book The Entrepreneur Next Door courtesy of the author and publisher. I liked the book (gave it 7 stars) and if you're thinking of starting your own business (either full-time or as a side hobby to bring in some extra cash), I think you will too.

This story deals with the question of what's more risky -- working for yourself or working for others? Here goes:

An entrepreneur was discussing the topic of risk with the host of a radio call-in show. The host said that being in business for oneself was risky. The entrepreneur’s definition of risk was living paycheck to paycheck, working for an employer in an “at will” state where you can be laid off or fired without notice. Or worse, your company could shut down. “That,” he said, “is taking a risk.”

Interesting perspective. What do you think? Which is more risky, owning your own business or working for someone else?

Comments

[Duane Gran]

Being beholden to any single source of income is risky, whether you are an employee or business owner. Even so, the biggest risk in owning your own business is the requirement to be an expert at many things. Most businesses must start small and this puts the onus on the entrepreneur to succeed at product development, marketing, negotiating and sales. Some people can fire well on all these pistons but most people (rightly) sense the knowledge risk of owning your own business.

That said, if you're an employee of a business you inherit much of its risks but often a fraction of its rewards. If someone isn't up for full-time entrepreneurship he or she can still benefit from a part-time business. This manages risk exposure while simultaneously diversifies sources of income.

[annab]

I like the idea of diversifying your income, maybe with a small side gig. I never thought of it like that before.

[ChrisCPA]

As TMND put it, an entrepeneur can have many sources of income as they usually have multiple paying clients while an employee usually has only one source of income. If an entrepeneur loses a client, they probably won't be in a pickle because they have other sources of income, but the employee might be...That's where having 3-6 months salary saved comes in handy.

On the other side, an entrepeneur has to risk capital ($) which could have otherwise been used for retirement (from being an employee) to start a business, and, as we all know, many businesses tend to fail.

Overall, if you have a viable and profitable business with a "wide economic moat", you are sure to be less at risk than an employee.

[Lord]

Most of an entrepreneur's risk is startup. Once things are profitable and growing you might even be able to hire employees. Once you can, they take much more risk than you.

[Pete]

There are a few things overlooked in the analysis of risk

1) If you are self-employed and even lose one client, with many living paycheck to paycheck - this starts putting them behind the 8-ball. A company usually does not fire employees if they lose just one client (because it is a part of business trend).

Now, if economy starts to slow down, companies may downsize as their revenues decrease. Yet, if you are one of the better employees, you are probably are not the first to go. If self-employed, you will probably lose revenue even if you are the best because people do not want to spend.

2) If you do lose your job from a company (get fired), you are entitled to unemployment (some cushion to fall back on). If your self-employed business fails, there is nothing. And, if it is a new business, you probably spent your emergency fund to get it up and running.

3) When you leave the corporate environment and become self-employed, it is harder to go back after being gone for 3 or more years. There is some doubt for some jobs/industries if you can hack working 9-5 job again.

Being self-employed is good and has great rewards (really good upside) if it works. Yet, we usually hear of the success stories and not of the others who did not make it (they typically do not write a book or teach a get rich class about failure).

People say that you need to be self-employed to be rich. Yet, ask some CEOs like Jack Welch what can happen in a company were the employee has the entrepreneur spirit. Yet, some work for a company and get lazy or complacent which does not happen if you own your own business.

[Foobarista]

I agree with this; I used to own a computer store and have spent the past few years as an employee in startup companies. I've only been layed off once, because of the company failing - I found another startup in a couple of weeks. But many people in my area who worked for "safe" companies ended up getting layed off, no matter how good they were at their work, due to decisions made by a distant "Management Team".

Since I've figured out that I don't really want to be a CEO, I'm happiest being in a company where I can do lots of things, and that's small enough that I can go yell at the CEO if he's being dumb.

My standing assumption is that I never have more than six months of "job security" - and less if the company is in fundraising mode.

[prlinkbiz]

I have been an entrepreneur for five years- build and sold one business, was bought out of another, and now building a third. It is a risk to start your own business... one I would highly recommend. The key is in managing the risks. Do start part time, you'll die without cash flow. Do build a team. Do use OPM. Do not give up. I believe this is the number one reason businesses fail- because the people do not persevere. The risk is well worth it, as you own an asset, you are in control of your future. Although, I have friends who play at much higher level than I do who say they would go back and work a 9-5 job and invest, instead of build the businesses they did- I guess it all depends on who you are and what you want. These are the days of the end of corporate responsibilty and the return of personal responsibility (Tom Peters).