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?
Uncertain Success
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.
This article is about Career, Choices, Entrepreneurship
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I understand where you’re coming from – but there are other things to consider that can make involuntary unemploymnt a PERFECT time to launch a well-defined business: Oftentimes (truly not ALWAYS) an employee will get some form of severance pay that could last several months. I recently had a friend who received 6 months of severance when he was laid off. The company also continued his health benefits for 6 months. He used this time to his advantage by job hunting AND studying for and receiving his PMP certification.
Having severance or unemployment benefits, government or employer-subsidized COBRA and a period of free time MAY be just the catalyst you need to launch your business with some measure of support in place.
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Starting a business is a great risk and I liked your suggestion ” … I strongly encourage you to decide as if you still had a paycheck …”. When it comes to business one needs to maintain a proper balance between risk, emotion and desperation and this advice seems to work quite well.
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One thing to be aware of is that in some states, starting a business disqualifies you from unemployment aid since you are technically “self-employed” even if you aren’t making any money. We discovered this the hard way and had absolutely no help besides our emergency fund and some kind family members who let us live in their basement for awhile. It’s something to look into in advance.
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There is another reason to strike into a new business in this type of ecomony. Costs are lower.
If you need to start with more employees than yourself, then they will likely be easier to persuade. Commercial real estate is cheaper, gas prices are lower, so pretty much any consumables are going to be easy to find, and the best of all, there are a ton of businesses going down, so you can find great furniture for cheap.
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I did this 5 years ago when I had a discouraging discussion with my (then) boss.
I borrowed start up capital from family (a desk, a computer and enough for the first month of rent on the smallest space in a shared office), and away I went.
Scary, uncertain, but worth it in the end.
I definitely suggest checking with your employement insurance jurisdiction. Some cut off benefits right away, some count NET income as income, others count GROSS income as income, and yet others will give you free training and a number of months of benefits to get you going.
Knowing what is available, and what you stand to loose is a must!
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There is a huge part of me which agrees with you as on paper when you suddenly find yourself out of a job you shouldn’t be taking on big financial risks. But then as you also say the need for money is a great motivator and many successful businesses have been launched when someone suddenly finds themselves out of work.
The trouble is that when you do get a job again you become comfortable getting your regular pay check and the risk of suddenly giving that up to strike out on your own puts a lot of people off. You also have to ask yourself if you will regret not trying to set up a business when the opportunity arose, even if you do end up failing.
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Uh, what? A guest post about entrepreneurship from someone who sounds like he has never been a successful entrepreneur?
Most entrepreneurs will tell you that the “putting food on the table” factor is the most motivating thing they have EVER had to make their business work. When I started my business, I didn’t have an “emergency fund” — I had credit card debt and severance pay.
For some people (like me), having a safety net would have made my business LESS successful. Because I didn’t have one, I had to “hustle”. And amazingly enough, it worked.
If Matt doesn’t want to be an entrepreneur, that’s fine, but he shouldn’t discourage those who want to be who don’t have the cash. Take it from me — if you want your own business (or just don’t want another job) badly enough, you will find a way to make it work!
-Erica
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It’s hard to say if it’s a good idea or not unless you can see the person’s situation. Several questions come to mind:
-What is your financial situation? Your debt and level of savings will help determine how quickly you need an income.
-Do you have any immediately marketable products and services?
-Do you have a strong potential customer base or will this need to be built? I have friends who were making money immediately, but they had a strong network of customers. If you have no customers it will take time which you may not have.
-What is your acceptable level of risk?
I think entrepreneurship is a great thing and gives people the best chance to build wealth, gain life balance, and achieve freedom. That being said it isn’t for everyone, and not everyone is ready.
My preferred time to start a business is right now. If it is something you truly want don’t wait. If you don’t have a savings built up you don’t have anything to lose. If you wait until you have built up a nest egg it becomes harder. Believe it or not it’s harder to overcome the fear of losing your savings than the fear of not being able to support yourself.
One thing to consider is that the best time to start a business is while you have a job. Spend 10 – 20 hours a week building a part time business on the side. This greatly lowers the risk. It also is easier to ramp up a proven business than start from scratch.
I’ve written a lot on entrepreneurship. Feel free to explore my articles at Wealth and Wisdom.
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I am 100% agree with the writer. I was laid of in May 2003 and I had made a stupid mistake by starting my own business in August 2003, just within 3 months. What happened? I have waste my 3 big years in that unsuccessful business. I have nearly lost £55,000 to keep that business up and running, and the most worst is I was nearly going to kill my married life.
I will just say one thing please follow writer’s advice. Do not start business when you loss the job and if you still want to do business, prepare yourself for the business by using those unemployed time and start the business when you again get the job. When you feel you are getting good reward from part time business, cut down the job hours (mind well, do not need to leave the job, leave that gradually), and give yourself more time to understand more business techniques.
I satule the writer and will request writer to send this kind of very very important articles.
God bless you.
Hari Aum.
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@Erica,
Thanks for your comments. First of all, I want to congratulate you on becoming a successful business owner. That’s not easy. And I know there are a lot of people, especially in the entrepreneurship blogosphere, who are encouraging people who have recently been laid off to “just dive in” and start a business.
While I understand your point regarding motivation, I think it would be irresponsible for me to suggest that people who have no emergency fund and who are in debt should increase their spending rate and take on new debt, which is exactly what happens when opening a new business. Can it work out in the end? Of course, as I said in the post and as you are living proof. But is it wise? Just because you (and my father) were successful, doesn’t mean it was wise.
According to the SBA, 50% of new small businesses fail in the first 5 years. That means for every person like you telling a story of success, there is another person who lost a lot of money and is very much worse off. The #2 reason for failure is lack of capital, and the #7 reason for failure is poor credit terms.
I am not at all discouraging entrepreneurship. Quite the contrary. I very much encourage people to take a reasoned approach to opening their own business. What is lacking in most of the common commentary in the entrepreneurship blogosphere is that very important word, “reasoned”. Entrepreneurship is not all about motivation. It is very much more about understanding costs and expected benefits. If you perform the analysis and are confident that the expected benefits will be higher than the costs, then motivation comes naturally.
If all one does is motivate people blindly to “take a chance”, then for every life that is improved with the aid of business ownership, there will be another life whose credit is ruined and savings are depleted. This is not a minor subject. This is people’s lives.
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I have to agree that the best time to start a business is when you’re still working. There’s an old proverb that says to “dig your well before you get thirsty.” Coming up on 3 years ago, the company I work for was in the process of being bought out and I realized how important is was to have something that I owned that couldn’t be taken away from me. I purchased some books on the type of business I was interested in and within a month (and about $100) I was in business. I’ve steadily grown it outside of my full-time job to where this last year I made as much in my business as I did full-time. This year I will make 2-3 times my full-time income and at some point plan on leaving the job. What’s wild is that the workplace situation actually got better once the buyout was completed and I’m on track this year to have my best year yet. Because of this, I’ll leave on my terms and not someone else’s!
Oh, by the way, I also started delivering pizzas at night to supplement our income during all this process. While this has been a humbling experience as a white collar “professional,” it has helped us make ends meet. Needless to say I’ve worked my tail off these last few years, but the rewards on the horizon are huge!
If you’re not scared of HARD WORK and have a sound business concept, there’s no time like the present to get started (whether you’ve just been laid off or want added security and freedom down the road).
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I can totally relate. I worked my way through college and finally earned a petroleum engineering degree. Upon graduation I moved my wife and son 3 times in two years. In January I was laid off and I was almost relieved due to the stress of always being away from home. I did not even look for another job, I bought my brothers fence building business and started a technology blog – http://www.techpost.org. It has been several months and I enjoy being my own boss, I’m getting the bills paid but I am also worried what the future is going to bring and if I am doing the right thing for my family.
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Hi Matt,
Thank you for your reply.
You write: “…increase their spending rate…”
That’s a fallacy. Many businesses can be started with little or no cash. I started mine with very little money. We’re not talking franchises here; I’m talking about someone getting off the ground doing consulting or something that pays the bills while they figure out how to leverage their time and resources to make more money while doing less work.
I think your perspective is that starting a business takes a considerable amount of money. My perspective is that starting a business can be as simple as registering a domain name, setting up a website, and creating content. Both can make you huge sums of money…just ask J.D., or Steve Pavlina, or Jeff Walker. (Or me, even.) This is the type of business I encourage people to start.
Is there more to it than simply setting up a website and hoping people will come? Of course, and I teach what to do next based on my own experience, but the point is that you’re taking action, and by taking action, you’re much more likely to succeed than anyone else.
-Erica
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Matt, the 50% failure rate that gets bandied about so much is a little misleading and unnescessarily frightening – it includes phantom businesses for money laundering that aren’t meant to last very long. In the United States, a country with one of the highest rates of illegal drug consumption in the world, that counts for an awful lot!
And I think you’ve managed to gloss over one point that is increasingly important as unemployment rates rise: choice. There are many people forced to work for themselves by circumstance – more and more now. Particularly in the manual trades, if they can find a way to do that in the structure of a real business, instead of just a little black cash work for a few days or hours at a time, it’s better for everybody.
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It isn’t for everyone, but sometimes you need to take matters into your own hands. I am a big supporter of Defensive Entrepreneurship– because I believe job security is dead.
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Great points, logical argument against starting up a business post lay-off. It’s always good to think things through.
However, what is everyone’s thoughts about starting up your own business right after finishing training? Obviously, one should think through a similar process, but do you think you should work someone first to gain some experience, or just start working for yourself right away to not “lose” that time that could be investing into your own business?
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I went into business to help people get the through the legal aspects of starting their own business. What I learned was that with all the other factors you cover in your article, the most difficult and often overwhelming aspect of starting your own business is the need to become a master (and not just a jack) of all trades. In our current corporate world, people are used to becoming specialists (button pushers). The world of entrepreneurial-ism does not allow for this focused approach. I think your candidness about the realities of starting a business is spot on and refreshing.
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Spencer makes a good point about prospective entrepreneurs needing to have a broad skill set. I’ve been training and studying for 3+ years to obtain a certified personal trainer credential and a ballroom dance teacher credential. But in addition to those skills – the skills I’ll be selling – I need to know how to keep books, how to do taxes, how to register my business and take care of all those formalities, how to establish a web presence, how to design and produce inexpensive marketing material, how to keep a schedule, how and when it’s to my advantage to give away services, and not least how to present myself as an authority. I may not know everything there is to know about my field – no one can say that – but I need to be able to demonstrate to my potential clients that my services have value. Most entrepreneurs are going to need to study these aspects of business life as well as the market for, and substance of, their goods/services.
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From the financial standpoint that undergirds this blog, these are all great points. However, from the entrepreneurial angle that often intersects this blog, coupled with the current recession, it reads as a kick in the teeth.
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Wow–the confidence and optimism that you exude is honorable. I’m not sure tha I would be able to jump back into the game that quickly. It would be awesome to posess all of the control for once.
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Hey Matt,
I think what really worked for me is when I got “canned” from work so to speak. When I was told that my last day was going to be in January of this year, I was pretty excited and scared at the same time.
It was probably the first time in a long time where I felt in control of my life and my choices. There is just something gratifying about having to rely on yourself to make the right choices and take the right actions – just like the first time you start any business.
I didn’t start my business overnight, I was working on it part-time for almost a year while working in my job.
If I wasn’t sent packing from my job, who knows how long I would have been there???
Now it’s much different. Since I’ve come to rely on my performance to create an income, I’ve stepped it up a notch and done things I had never done before; that’s been the difference for me…..
… not only that, but also trusting in who I am.
Knowing that I’ll make the right choices along the way and knowing that no matter what happens or how bad it gets, I can always rely on myself to make things work and turn things around.
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One way we are saving about $100 a month is buying the store brand for most products. I know that in most cases the quality is lower but the grocery store we use HEB (Texas only) goes above and beyond to match the quality of name brand products.
If you are a brand snob, like we once were, try out the “savings” brands and see if you find anything you like.
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I, too, started my business with very little capital, and I have yet to make much money at it. The good news is that I’m still at my job, so I can do things out of pocket. The other good news is that I am very, very good at keeping my costs down.
I think the advice given here is good, but I also understand and agree with the points made that it is not an all-or-nothing scenario. Some people have greater risk tolerance, creativity, and adaptability than others. Some people also have investors, credit lines, etc upon which they can draw.
I really think it varies as much as we entrepreneurs vary.
I’m grateful to have a job to support me while I start my little business; however, if I got laid off tomorrow, I certainly wouldn’t set that business aside.
Jen M.
JenniferLynn Prodcutions, LLC
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The fear of losing unemployment benefits because the State disapproves of your starting a business is a poor excuse for not starting a business.
The State requires you look for work full-time. So, fine. Spend 8 hours per day, 5 days a week looking for work. You still have the rest of each day plus weekends to start your business on your own time, your own nickle.
Don’t let the State fool you into thinking it owns your life.
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Starting a business as a side-hustle while keeping your day job is a great–and safer–way to learn how to properly run a business, while giving you the security (of income from your day job) to test your business idea without much risk. You might even grow your side hustle to a point where you can ditch your day job.
That’s essentially what I ended up doing. After consulting for a while, I realized that my time spent at my day job was getting in the way of how much I could earn consulting; at that point, I went part-time at my day job while I ramped up my business, and a couple months later, quit my day job completely.
However, I didn’t start my consulting business thinking that it would eventually become my full-time gig. When I started consulting, I just liked having the extra money–which was wonderful.
Having run by business for nearly 5 years, growing it steadily during the worst economic downturn in decades, and being able to QUADRUPLE my former day-job salary, I’d offer the following advice to aspiring entrepreneurs:
–>Don’t overthink things; just start doing something, and be persistent. Your efforts will snowball over time.
–>Get your product/service offered to customers as soon as possible. This lets you test your idea quickly to see if it’s viable, and gives you valuable feedback from customers.
–>Research whether there’s a market for your product/service. Don’t spend a ton of time on this, but get enough info to make a decision. I have a couple articles on my blog where I show how to identify a profitable niche.
–>Make a BRIEF business plan. Don’t go all-out, just write down a handful of bullet points to clarify your business.
–>Start your business as a side hustle while keeping your day job. Once you’ve grown it to the point where you have a reliable minimum monthly income, then you can think about quitting your day job.
–>Do NOT use debt to finance your business. Debt creates risk and stress, which can lead you to make poor decisions. Figure out how to bootstrap your business instead.
Following my dream and creating my own business has truly been life-changing, and has completely changed my worldview; I’m no longer dependent on a single employer, and I continually see new business opportunities.
As a result of my daily efforts to build my own business and make it succeed, I feel empowered and happier. I complain less, and when I find myself complaining, I try to refocus on how I can change the situation instead of just bellyaching about it. I’m modeling those behaviors for my kids as well, and teaching them about entrepreneurship and how it can lead to greater independence.
You can check out an interview I recently did where I talk about how I made the switch from employee to consultant, and where I talk about some of my initial fears & doubts, and give actual income & rate numbers::
http://www.startmyconsultingbusiness.com/how-i-made-the-switch-from-employee-to-consultant.
Greg Miliates
http://www.StartMyConsultingBusiness.com
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