Becoming an Entrepreneur is less risky than you think!
An entrepreneur is defined as a person who organizes and operates a business or businesses, taking on financial risk to do so. Risk is part of the definition. Entrepreneurs are somehow able to overcome their fear of failure and set their sights on the great rewards of a successful enterprise. Investors visualize the relationship between the amount of return gained and the amount of risk undertaken, as a risk-return spectrum. If you’re considering investing in a franchise, you’re probably well aware of the risk-return tradeoff. So how does the path of the entrepreneur compare with the boulevard of the cautious? The answer might surprise you.
SUCCESS RATES COMPARED
The Chronicle of Higher Education with support from the Bill & Melinda Gates Foundation has been compiling data on a complex subject: which colleges do the best job of graduating their students.1 As an investor weighing the risks of becoming an entrepreneur, you might appreciate the perspective that you get when comparing the likelihood that you will still be in business after four years2 with your chances of graduating from a four year college in that same period.
TOTAL INVESTMENT
Of course, the amount of investment is important in measuring the risk-reward trade off, as a greater investment has a greater potential for loss and therefore a greater risk. According to the U.S. Department of Education, the average tuition, room and board rates charged for full-time undergraduate students in degree-granting institutions was $22,092 per year.3 That’s $88,368 over the course of four years. There are many different ways to come up with the average investment for a startup. For this example, the number is calculated by taking the median total investment as provided by 330 franchise concepts that can be found on popular franchise portals.
According to compensation survey administrator PayScale, the average income of small business owners varies widely depending upon their level of experience. For example, small business owners with less than one year of experience in running an organization earn an annual salary ranging from $34,392 to $75,076. Those with more than 10 years experience, on the other hand, earn upwards of $105,757 per year.4 Even using the low end of the range, a franchise startup can earn $137,568 during the four years that a college bound investor is embroiled in full time studies. With a part-time job the student can expect to earn $32,905 while completing her studies.5 Factoring these numbers into the four year investment, the franchise startup investor would actually end up offsetting their compared investment by $104,663, a total investment that is $68,031 less than the investment for college.
THE UPSIDE
The other side of the equation is the reward. A 2012 college graduate can expect an average salary of $42,666.6 By contrast, the average first year small business owner will earn $54,734. However, it’s the upside that every investor dreams about, and for nearly 25% of small business owners, that means earning over $200,000 per year.7 Compared with the total income of all households, where only 2.67% will earn more than $200,00 per year,8your wager for achieving a high financial reward is well placed with an investment in a franchise.
The purpose of this post is not to say that college is a bad investment. Quite the opposite; it puts in perspective that investing in a franchise is a comparatively safe investment when calculated on a risk-reward spectrum. Despite the entrepreneur’s reputation for being a risk taker, their investments can actually be compared favorably to one of our most historically conservative institutions.
If you have questions about how we can help you become a successful business owner OR want to assess your aptitude for becoming an Entrepreneur, feel free to contact me and ask about our Entrepreneur Assessment.
SOURCES:
1The American Dream 2.0 report.
2University of Tennessee Research; Date Verified: 7-26-2012.
3U.S. Department of Education, National Center for Education Statistics (2012).
4PayScale 2010 Compensation Survey.
5Average wages for fast food cook as reported by the Bureau of Labor Statistics, January 2010 ($7.91 x 20 hrs/week).
6April 2013 Salary Survey, National Association of Colleges and Employers.
7Report by the Office of Tax Analysis at the U.S. Treasury.
8Census, ACS 2011.
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