Is your New Year’s resolution to start a business? If so, don’t wave goodbye to the security of a steady paycheck so fast.
6 steps you need to take before handing in your notice
In workshops with prospective entrepreneurs, I encourage first-timers to wait to quit a salaried job for as long as possible.
Too often impatient entrepreneurs leave salaried positions with only a vague notion of their business goals. They quit to start a business but haven’t really thought through what might work with customers in the marketplace.
With each passing month, their savings and confidence drop. This is why so many startup businesses fold early – they start from a point of weakness rather than strength.
A smarter way is to try to complete as much time-consuming administration, business planning and customer research projects as possible before cutting off paycheck income.
Here are six pre-startup action steps you should take...
1. Get organized. I wince each time I hear startup entrepreneurs say they can't call on customers until they get their business and domain names, logos, websites and marketing materials in place. Most of this work can be completed on weekends prior to leaving a day job.
Also, to prevent having to redo all startup business organization and marketing materials, make sure your selected business and brand names are free of trademark conflicts. Start by visiting the U.S. Trademark Electronic Search System (“TESS”) at www.uspto.gov. All searches are free.
2. Get your financial house in order. It is said that the best time to apply for credit is when you don't need it. Entrepreneurs tend to get a better deal if they tap the equity in their home or apply to increase credit card spending limits before they leave a salaried job. Also, pre-startup is the right time to improve poor personal credit scores that can increase the costs of small business loans, equipment leases, credit card processing services for e-commerce operations and more.
3. Organize your company structure. Will your startup be set up as a sole proprietorship, a Limited Liability Company, a partnership, an S-corporation or a C-corporation? This is a fundamental question that, among other considerations, determines the taxes entrepreneurs will pay on business profits and personal income. Work through the pros and cons before you leave your day job!
4. Research health insurance. Before you quit your job, re-visit your employer's benefits literature. Under federal law, if you work for a company with more than 20 employees you may be able to stay in your company's health insurance plan for 18 months provided you pay the entire cost of coverage. Compare the rate you will pay your employer’s insurance company through COBRA to other health insurance options to see which deal is best for you.
5. Consider tactical employment. Every startup entrepreneur will make a lot of avoidable beginners’ mistakes. Sometimes these mistakes can overwhelm a young company’s financial and operating resources. One way to avoid costly startup mistakes is to search for what I call "tactical employment." Tactical employment allows prospective entrepreneurs to make beginner’s mistakes on another employer’s dime and time.
If, for example, you want to start a catering company, work for another catering company first. If you want to franchise a cool burger concept, work at McDonald's to learn how to hire workers, manage inventory and serve customers from that burger chain's best-in-class procedures. A short tactical employment stint can also give prospective investors and lenders greater confidence in your industry-related experience.
6. Ask the hard questions. One of the most important what-if questions I challenge entrepreneurs to consider before starting up is who they will turn to in a cash crisis. Will you turn to family members or independent investors to fund your new company? Will you turn to banks for a business loan? How much lead time do different funding sources need to make a decision?
The advantage of considering how you will fund your new business in an emergency situation is to empower you to avoid that fateful situation! It’s a matter of becoming comfortable with financial decision making – embracing it rather than avoiding it.
The starting point for becoming more sophisticated on financial issues is to learn the difference between debt and equity and what types of funding are available for different types of businesses. Just mastering a few of these real-world fine points will make all of your business planning ready for real-world operations.
Are there any risks to working evenings or weekends on a startup business plan while working for another employer? Yes, entrepreneurs who intend to compete with their current employers or develop potentially patentable technologies should understand the issues associated with intellectually property ownership. In addition, moonlighting entrepreneurs should work at their business on their own time and completely off employer premises.