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Tuesday, July 14, 2015

So What is the Secret? How Does One Plan to Become Self Employed?

My posts so far have all been written to establish the premise that successful self-employment leads to a better quality of life in the long run. I'm not yet sure about the success part, as I have only just begun this journey, but I can tell you what steps I took over the last year to make this dream a reality:

1. I prepared a business plan and had it evaluated by several people including potential investors.
2. I cut back on the trappings of the professional life.
3. Once I knew that my plan was viable I began to invest some money in inventory at low prices.
4. I also saved enough money to cover living expenses for 18 months.
5. I made sure to have my medical check-ups and dental appointments in the period while I still had benefits, so that any imminent work that I might need done could be covered.
6. I paid a lot of my ongoing expenses upfront - like car insurance in order to save money and looked at where I could cut expenses.
7. I informed my partners almost 6 months in advance of my planned departure and approached them with a transition plan so that they would not be left high and dry.
8. I started organizing elements of my business years before this, and leading right up to my last day.

The most important elements of my plan in my opinion were #1, #7 and #8. Why?

For starters, you don't want to leave a position like partner of an accounting firm with a bunch of ill will coming from your clients, your staff and your other partners. If you have been an effective leader in your firm, then you are going to be surprised by how many people are upset to hear that they will be losing you. However, if you do it right, you can leave with all kinds of goodwill and encouragement from these same people. Nothing helps keep your thinking positive in those months leading up to your departure like encouragement from your clients, staff and partners. This is critical, because once you realize that there is no turning back, you are going to experience FEAR. It's not a bad fear - it made me feel very much alive. But I suspect that is because I had positive encouragement from all my clients and staff. I think if I had cultivated ill will by mishandling my departure, then my fear would have had a very different effect on me. The key to handling it properly was giving people lots and lots of notice. I told my partners in January that I would leave at the end of June. Why June? Because in Canadian accounting firms this corresponds to the end of the busiest time. It's very difficult for firms to hire anybody good before the end of June because to leave before then is generally considered to be suicide for your professional reputation.

So no matter what line of work you are currently in, you want to plan your departure date to coincide with the end of your firm's busiest time, when you know they will have time to adapt to your loss and find or train a suitable replacement. In addition to giving lots of time, I let my partners know that they could call on me at any time if they needed me. In return, they have agreed to allow me to continue to attend morning tax seminars and professional development courses, so that I can maintain my good standing with the provincial institute.

My business is buying and selling stamps on e-bay. So before I could even formulate a realistic business plan, I had to understand how e-bay works, and I had to have an established reputation as a seller before I began this business on a full time basis. So what I did five years ago, was open an e-bay store for Canadian stamps. My plan at that time was to trade in my spare time as an alternative to investing in the stock market. I never intended to become full time when I opened the store. Doing so allowed me to gain a thorough understanding of how to sell on e-bay and to build a 100%, 4.9/5 star feedback rating of almost 2,000. The significance of this is that I can now list items with no limits, and Paypal will release my funds with ho holds. Normally if you are just starting out e-bay will severely limit the amount of listings you can place until such time as you demonstrate to them that you can earn the trust of buyers. Also, it can be very difficult to sell an expensive item, say over $50 unless your feedback score is over 1,000. The higher your feedback score, the easier it gets to sell to customers. Gaining this feedback takes time. So the best way to plan for a full time e-bay business, if that is what you decide to do is to start an account right away and just dabble in your spare time.

Working on my business after I told my partners of my upcoming departure was easy because by then both fear and excitement had taken over. The trick here was to not allow it to consume me. Make sure that you make time for you friends and family during this period, and no matter how tempted you are, don't burn the candle at both ends. You want to have enough energy after your last day to start work right away because there are no paid vacations when you are self employed.

The business plan is touted by experts as the most critical step to successfully starting a business and yet nearly everyone either ignores this advice, or their plan is so "back of the napkin" that it has very limited use as a tool to monitor the business. In all my 21 years as an accountant, I had only ever been asked to review a business plan once, and that was because the client needed it to secure financing. I had an advantage in the sense that I am a trained professional accountant, so that formulating the financial calculations was easy for me, and I was able to do a 10 year forecast. If you are not familiar with accounting, then you should invest in the services of a good accountant. You can always write the narrative portion of the plan and give it to your accountant, who can use it to begin formulating the projections. But what is just as critical as formulating the plan, is having other people read it and give you feedback. Because leaving behind a partnership position was such a big deal, my acid test for deciding whether or not to do this, was to show it to prospective investors. If the feedback was positive, at least from an organization like the Business Development Bank of Canada, then I knew that the plan was viable and should be pursued.

One of things that you will notice if you take doing a business plan seriously is that it will force you to justify your assumptions, do your homework, and consider all the potential contingencies. Just doing that will solidify your understanding of your own business model. Also if you have prepared, or your accountant has done a good job of preparing the projections in excel, you can use that as a basis to form new projections as the actual results of your business begin to emerge.

I already talked about cutting back on the trappings of professional life in my other posts, so I won't repeat what I said here, except to say that you want to do this as you are going to have to adjust to not having an income until your business can afford to pay you one, and unless you save a lot of money to last your start-up period, you are going to need to cut back and that is much easier to keep up if you have already been doing it for several months, as opposed to having to go cold-turkey the week after you leave your job.

In terms of saving and investment, what you do in this regard will depend completely on what your business plan calls for in terms of start-up capital and lead time for sales generation. My business involves buying wholesale and selling at retail. The mark-ups are very good, but it can take up to two years or more to sell a single item from my stock. Therefore I need a lot of diverse stock if I hope to generate a monthly income that I can live on. Secondly, the profit earned on each sale needs to be high enough that I can draw most of those sales dollars out of the business without sacrificing the ability to grow or maintain the stock at its current levels. Because of this time frame, and because I am planning on offering stamps from countries I have never sold before, I anticipated that it would take 18 months before my business could afford to pay me a salary. So I saved up for 18 months in addition to buying stock in preparation for my full time launch. You may find that you don't need nearly as much time, or that you need more. Dabbling a bit before you formulate your plan will give you better insight into how long it might take to make the business a full time venture.

Finally, my last points about cutting back expenses and paying for monthly expenses upfront are simply about maximizing the effectiveness of your savings pool. Until you start paying yourself a salary, your pool of money is finite and it has to last a period of several months. So if you have an opportunity to pay for an expense now that you know you will have during that period and you can save money by doing so than it make sense to do it.

I will discuss writing a business plan in more detail in my next post.


  1. Very informative post.

    1. Thanks very much! Is there anything that you think I should have covered in this post?

    2. Thanks very much! Is there anything that you think I should have covered in this post?