Optimism Bias: The Silent Killer of SMB Financial Planning - 2/22/2025

My hand cramped and my forearms felt stiff...the same feeling I would get after an hour of rock climbing. I was working on the 8th stroller, helping to repair and clean it. Lisa and I were in a rush as we had promised a 72-hour turnaround for busy parents.

Our company, Stroller Spa, was in the business of fixing and cleaning high-end strollers - think Bugaboo, UppaBaby, Maclaren, where some models would fetch over $1,500. My sister and her friends had stumbled upon this business model in the Bay Area, and we were looking for extra income after some of my real estate deals had turned sour. Turns out people in Hudson County's Gold Coast and Manhattan didn't have a good way to deep clean their strollers. Picture banker-like husbands and socialite moms as our clients, in floor-to-ceiling windowed apartments looking out at the downtown skyline or Chelsea lofts in the Meatpacking district. They had money and used it to buy time.

Stroller Spa was in its 2nd year out of 3 as the exclusive repair center for these 3 brands, and our schedule was packed week after week. At the start, Lisa would take a $100 repair job and upsell a deep clean and sanitize for another $250. We were averaging 15-20 jobs a week, so business was good. The franchise was a success, and the manufacturers were so pleased with our ability to serve their customers that they offered us the opportunity to purchase parts at a discount, where we could mark them up at a healthy margin.

I finished a few drop-offs on the Upper West Side that evening. It was much easier to drive into the city with our Honda Pilot and double-park at these high-rises. Driving home, I was thinking about the parts purchase and the tens of thousands of dollars it was going to cost us, and how much profit we were going to earn as a result. Operations were running smoothly, and the inbound requests for our help were constant. I remember being giddy about it driving home. We didn't have the money - just a little savings post-Global Financial Crisis - but we had credit cards, and the adage "nothing ventured, nothing gained" rang true.

Two pallets arrived a few weeks later, 5 feet high, 4 feet wide, probably close to $50,000 worth of parts. Paying 21% APR and using the minimum payment strategy made me anxious, but I used the nervous energy over the next two weeks to inventory and organize it all in our workshop. There were boxes of all different sizes, some marked well, others just thrown into together in a box. After that was sorted, we were making much more money, and we had the benefit of quicker turnaround for our customers since everything was on-premises.

The following month, Lisa shared with me that some of the baby store retailers had started offering cleaning services. I told her not to worry since we were still the manufacturer-authorized repair service. The 800 numbers were routed to us, and I also assured her that busy parents wanted door-to-door service, which was our operating model and a competitive advantage. I was very bullish in hindsight.

As we headed into the Spring season, we were excited, as historically this is the busy season. Parents want to freshen up their strollers and fix any nagging issues, except the calls were a third of what they were just a year ago. As a franchise owner, we called the franchisor in a panic to find out that our authorized service contracts were not renewed, as the stroller companies were convinced that steering potential new business to the retailers would promote brand/store loyalty. I offered to call and negotiate, but it fell on deaf ears. We didn't have an exit strategy, nor did we know what to do with tens of thousands of dollars' worth of parts. Our assumption of a manufacturer's loyalty to our company was extinguished by their own profit motive.

I sat in the workshop, lined with parts, and part of our team entertained building these $1,500 strollers from scratch using the parts in stock. The final product would be heavily discounted, of course, as it would not be registered, and we couldn't produce a warranty. We also had to consider the liability; they are baby strollers, after all. As we went into the summer after our third year in business, we saw less than 5 jobs a week.

On the bright side, as a family, we did a lot more road trips and camping in New Hampshire and Maine. It was great to get out of the city and the constant hustle to really breathe. Before the start of the school year, the Toronto franchise called us - we had become close friends after we trained and mentored them for a few weeks. Business had not slowed for them, and they offered to take all our inventory. By then, my youngest, Jack, was out of the stroller. We thought it was a sign to be out of the stroller business too. I read somewhere that other women's pheromones could stimulate maternal instincts and desire for another child. We shuttered Stroller Spa that December, unbeknownst to us that Lisa was 4 weeks pregnant with Ian.

By the time Ian was born, I had rebuilt a Bugaboo, two Uppababys, a Maclaren, and an English Silver Cross Pram. Our neighborhood in Jersey City is very pedestrian-friendly, and we would walk everywhere with him. We took great pride in pushing Ian in different strollers daily. The whole family had more time for walks like this.

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In my book, Breaking Barriers: Overcoming the Top 5 Financial Myths that Keep You Broke - A Guide for the Small-Medium Sized Business Owner, I explore how many businesses overestimate growth because like me I see the world with rose-colored glasses. Having a strong team, who are honest and objective, leads to the healthy dialogue that will account for the blind spots that could lead to these three common mistakes:

- Mistake 1: Overestimating Revenue Growth: The "Dunning-Kruger effect" is discussed, where business owners often to overestimate their ability to grow revenue, leading to unrealistic financial projections.

- Mistake 2: Underestimating Capital Needs: Entrepreneurs often suffer from "optimism bias", where they believe they are less likely to experience negative outcomes and more likely to have positive ones. This leads them to underestimate the true capital needs of their business.

- Mistake 3: Failing to Delegate and Focus on the Big Picture: The "illusion of control" and "endowment effect" behavioral principles are explored, where business owners feel they must be involved in every aspect of the business. This prevents them from delegating tasks and focusing on the strategic direction of the company.

Buy the book: https://a.co/d/a66ojDT

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