This is a guest post from Matt, a long-time GRS reader.
After earning a master’s degree in electrical engineering, my father joined a large technology company where he did quite well for himself. The company transferred him twice, requiring him to pick up and move his newly-created family across the country. Then he was laid off.
Vowing never to let this happen again, he leveraged his network to recruit good people for a new electrical engineering business of his own. Over the last few decades, his business has grown well and he has achieved financial independence.
Meanwhile, it seems like every day I hear about someone I know being laid off, including here on Get Rich Slowly, where there are questions from readers on what to do after job loss. For many, as with my father, starting a business has always been a goal, and giving entrepreneurship a shot after being laid off is a natural next step. But is it a wise one?
You can be successful, as my dad has been, by starting a business after losing your job. The question is whether you would have been more successful if you controlled when to go down the path to business ownership.
- Would it have taken you fewer years to become profitable if you waited until the market was right?
- Would your life and the life of your family have been easier if you built up more capital?
- Could you have achieved the same outcome with considerably less risk to your savings, your credit, and your family?
Starting a business is scary, and it should be. Businesses require significant investments of savings, credit, time, and energy. After having heard my father’s success story, you might be surprised that I don’t believe starting a business after having been laid off is a very good idea; in fact, just about any other time would be better.
Emergency Fund Burn Rate
After a layoff, your most important asset is your emergency fund. Aside from temporary government assistance, your emergency fund is the only way you can continue putting food on the table for yourself and your family. If your new business venture fails, not only are you back in this tough job market, but you have likely burned through your savings.
Even if your business is ultimately successful, your 8-month emergency fund won’t last eight months when it has to support you, your family — and your business. Can your emergency fund last until your business is profitable? How certain are you, especially in this economy where your potential customers may be holding more tightly to their pocketbooks?
Timing is Everything
When you are voluntarily leaving the employment world to start a business, you are controlling when you’ve built up enough savings to hedge against the risks involved. You are picking the right time to enter the market based on the costs and projected revenue. You are taking into account current rents, equipment costs, tax incentives, and a ton of other business considerations aside from your own personal financial situation.
Psychological Barriers to Starting a Business
For many people, fear is an overwhelming barrier to entrepreneurship. And when someone else makes the decision to leave your current job for you, it surely makes that part easier. I think this is why many people view job loss as an opportunity to take the leap. But it’s important to realize that you are almost certainly in a much better position financially, emotionally, and strategically when you have made the decision while still enjoying the safety of a steady income.
Necessity is the mother of invention, and suddenly needing a source of income can be a serious psychological motivator. The time is not ideal to jump into business ownership, but don’t waste the motivation!
While you are searching for your next job, I think it would be a great idea to devote some of your free time to further developing your ideas for a business. Then once you’ve obtained your next job, re-established yourself financially, built-up excess savings, and determined the proper time to enter the market, you can begin to implement the idea with confidence and a much faster road to success.
If you are still viewing your unemployment as an opportunity to open your business, I strongly encourage you to decide as if you still had a paycheck. That way, emotion and any feeling of desperation does not drive you to take on too much risk. Move forward with the process, but take extra care to account for the extra personal risk!
Photo by Shawn Himmelberger.