How Not to Go Broke When Starting Your Own Business
4 tips for for getting your ducks in a row to smooth your transition from employee to entrepreneur.When New York City executive consultant Stefanie Smith was toying with the idea of leaving her career at Grant Thornton and starting her own firm, it was a fellow alum of Wharton’s
MBA program who pushed her to take the plunge.
“You’ve done all your homework. You’re finished with the research. Now, the last thing to do is act on it,” the classmate told her.
Smith left behind her role as a supervising consultant, specializing in organizational and operational productivity, and dived into running her own boutique firm. Her goal was to provide more customized and flexible services to her clients than was possible in a staff role. She soon ended up landing Grant Thornton and KPMG as clients.
That was in 1996. Today, she has no regrets that she has poured her energies into her business, Stratex Consulting. “You have to have the courage to invest in yourself,” says Smith.
Not everyone’s transition from employee to entrepreneur goes as smoothly. Here are some tips on how to quit your job and start a business with a minimum of pain.
Don’t quit your day job tomorrow. Saying “See ya!” to your boss may be tempting, but not so fast. It may take months before your startup can pay your bills, so you may need to keep working in a traditional job for a while. Research by Gallup last year found that only 38% of entrepreneurs with businesses that are one-year-old or less depend on their venture as their main source of income. But once businesses are two to five years old, 51% of owners rely on them for their primary income. In the meantime, many keep other jobs.
Test the waters. Try to find your first client while you are still working, as long as you haven’t signed agreements that prevent you from taking on outside clients. “All you need is your first client to be in business,” says Jaime Klein, founder of Inspire Human Resources, a consulting firm in New York City.
Can’t find a client? Take a hard look at your business model. “There might be something fundamentally wrong with it,” says New York City career coach Caroline Ceniza-Levine. “You may need to change your strategy.” Or it could be that you don’t enjoy crucial aspects of running a business, such as closing deals, as much as you thought you would. That’s valuable information to have—before you’ve quit your job.
Eyeing a business that requires a big outlay of capital? Try a small, controlled experiment to see if you like running one, suggests Ceniza-Levine. “Instead of a retail store, start a popup store,” she says. Or try volunteering your services to contacts who run businesses like the one you want to start. “See if you like their lives,” says Ceniza-Levine.
Build your cash reserves. You can shorten the time it takes to quit your job by living frugally and tucking away startup money. If won’t be able to rely on another source of income, such as a spouse’s paycheck, during the launch period, save about a year’s worth of living and business expenses before you quit your job, advises Rohit Arora, CEO of Biz2Credit, an online matchmaker between small-business borrowers and lenders in New York City. “Anything you do to start a business will take double the time and expense that you think,” says Arora.
Launching a business in an area where you have experience can help reduce the amount of money you need to save, he says. “Having prior experience is more valuable than cash,” Arora says. “That’s more valuable than cash. It will teach you a lot of tricks for how to start a business cheaply and leverage your contacts to start the cash flow of the business much faster.”
Make sure you’ve got a support team in place. When Smith went into business for herself, she built a “dream team” of trusted colleagues to guide her on an informal basis. “You want smart, honest people around you who really understand what you bring to the table and what makes you special,” she says. They gave her input on everything from her business cards to how to define herself in the market.
As she built her business, their candid feedback helped her raise her game. When she wrote her book, The Power of Professional Presence, for instance, her colleagues gave her very specific editorial suggestions, such as including the type of anecdotes she shared in her speeches. “I had to completely revisit what I had written–which worked perfectly well as a consulting program–and rewrite until the voice was authentic,” she says.
Your support team also needs to include your life partner, if you have one. “It’s important you have your spouse on board when you are going to start a new business,” says CPA Jay Penn, managing partner at tru Independence in San Francisco, who has advised many registered investment advisors who have left Wall Street firms to start their own. “Going from having a regular W-2 paycheck involves everyone in the family,” he says. “If you have the support of the people around you, you can make anything happen.”