That Would Never Happen to Me! - The risk of Optimism Bias

|Advisor Corner

Our firm was recently engaged to find acquisition targets for a buy-side client in the metal fabrication space. During the search, BAMA uncovered numerous qualified acquisition targets for our client; but, the unfortunate stories of two companies stood out.

One was a metal fabricator, in business over 20 years. The other company was also in the metal services space for more than three decades. When we first spoke with the owner of each, both confidently anticipated strong sales growth and continued success in the coming year. They weren't ready to sell given their strong pipeline and projections. However, within the next six months, both companies sent their employees home, auctioned off their assets, and shut their doors for good.

What? Why didn’t they see this coming?

They couldn’t. These owners held bullish expectations for their business. They assumed the good times would keep on rollin’! But in doing so, both overlooked the risk of a negative event and didn’t plan accordingly. This is Optimism Bias. What if your big customer halts orders you were counting on, that costly new piece of equipment doesn’t generate the cost savings you calculated, your disgruntled employee wins the frivolous lawsuit, these higher interest rates make that next loan harder to get, or you don’t recover from that illness as quickly as you expected?

Ok, but those things wouldn’t happen to me…

Unfortunately they do happen and they can happen to you. Entrepreneurs are optimists by nature – That’s a great thing! – But, don’t fall into the trap of Optimism Bias. When you underestimate the probability or impact of these negative events, overconfidence can blind you to the real risks every business faces, including yours.

As you think about the risk/reward profile of your business, consider whether it's time to reduce your risk exposure by divesting a stake in your business and securing the wealth you’ve built.

If you're ready to minimize your risk, BAMA can bring you highly qualified capital partners or strategic players that allow you to take chips off the table and provide your business with resources to help weather storms you can’t see brewing.

If you're interested in joining TEAM BAMA, please submit a resume and cover letter telling us why you'd make a great addition to our pride.

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