There may be no leap more daunting than leaving a secure, full-time position to become a solo entrepreneur.
The risks are real. You are making an all-in bet that you'll generate an ongoing profit that meets your needs (and those of your employees), year after year. You're low on capital, light on experience, unproven as an operator, and relatively unconnected. The deck is stacked against you, and if you fail, financial disaster looms.
It's enough to make a career professional stop in their tracks and flee back to the relative safety of Fortune 500 employment.
Fortunately, there are many ways to mitigate the risks of becoming an entrepreneur, staying solvent amid the uncertainty. What follows is a guide to making the leap successfully, confronting the dangers head-on while taking full advantage of the benefits of being your own boss.
This isn't theory, but rather the path I followed to progress from a low-level bank employee (making less than $40k a year) to the CEO of a multi-million dollar multinational. This process works, and it will get you there.
Underlying my entire thesis: you can (and should) move from employee to owner in stages. Despite the article's title, this is not a brave leap, but rather a cover-your-ass strategy that nearly ensures success. Read on.
The Low-Overhead Solo Operator
When you're starting out, you'll want to keep overhead as low as possible for as long as possible. This rule alone could save you from disaster; piling on bills before they're supported by gross profit is an easy way to go out of business. Concentrate on getting things done with what you have at hand, and commit to as few long-term bills as possible.
This means your office is the kitchen table, your laptop, and your cell phone. You are the sole employee, the owner/operator/secretary/janitor, and you're building the business in your spare time. You're providing your service on-site, in public places, and at your clients' businesses and homes. You grant credit to no one, and you're ruthless about closing.
By keeping overhead near-zero while getting paid quickly, you're creating a cash flow positive business. This is critical for the budding entrepreneur: take in more cash than you send out, and stockpile every penny. This pile is what will get you to the next level.
To accelerate progress, make sure no money comes out of the business to pay your personal bills. Keep your full-time job and reduce personal bills to near-zero. Sell your extra car, cancel your once-a-day Starbucks habit, take on a roommate, jump on public transportation. At this stage in the game, your money and the business's money are largely indistinguishable: extra money from your full-time job/savings gambit can be contributed to the business, and any dollar of profit generated by the business can stay in the operating account.
Your job is to amass the biggest pile of cash possible; it's what enables the next step. Many budding entrepreneurs screw this up royally: they quit their job, hire employees, rent out commercial space, keep their current lifestyle, and burn cash like there's always more coming. They set up a cash flow negative situation and expect to outpace its ongoing drag with high-velocity business growth. This is a longshot, and likely to leave you broken instead of rich.
Note that you may stay in the low overhead, solo operator stage for quite a while. You may even reach capacity constraints and forgo potential growth in order to amass cash. Still, don't lose faith. This is a patience game. You're saving money now so you don't need to generate it through operating profits later, a move that will provide immense psychological benefit when the risks get bigger down the road.
Adding Employees (Intelligently)
You cannot grow a business by yourself. At some point, the sheer weight of the day-to-day tasks will overcome your ability to handle them. You'll dedicate yourself to mopping when you should be selling, you'll be sending out invoices when you should be meeting potential clients.
You need to add someone to take on these tasks. The temptation is to add a co-founder, someone who will work for equity rather than dollars. Avoid this boondoggle. Unless your potential co-owner brings a very valuable, unique, and monetizable skill set, you'll be greatly diminishing your long-term personal financial prospects by surrendering equity at this stage.
By way of illustration, a distribution scenario: if you give up a mere 20% stake in the business, you'll need to increase profit by 25% just to walk away with the same amount of money you would've received if you'd stayed the 100% owner. This is a large setback unless you've got a very valuable co-owner.
Instead of offering up equity, pay employees with cash, and have them perform the non-growth tasks on your schedule: clerical work, bookkeeping, cleaning, etc. Pick the tasks that take you away from growing the business, and turn them into paid positions. You're freeing up your time for the most profitable tasks, the ones that will make a difference in top line growth and bottom line profit.
That said, never hire ahead of gross profit. Until you have the money to pay an employee, you're still responsible for doing the job. Link this back to the idea that you should minimize your personal cash needs, and the path forward becomes obvious: if you don't need money from the business, you can allocate it to hiring people to do the less valuable (but still necessary) jobs in the organization, leaving you free to grow the top line. This is the path forward.
You'll increase gross profits during your newly-found free time, a cycle that will enable you to hire ever-more valuable employees, your want ads moving from clerks to salespeople to marketers to managers to executives.
Don't Quit Your Day Job (Yet)
Once you've got an employee or two and you're generating profits in excess of your personal financial need, it's enticing to add additional overhead. You'll want to rent an office, buy new laptops for the crew, expand your space, and take on another employee. You'll want to tell your old boss to go screw.
As tempting as that sounds, we're not done yet, and you'll have to save your quitting speech for another day. Go back and amass another pile of cash. Continue to keep overhead low, leave all the money in the business, and hire out against the tasks that don't grow the top line.
While you'd be forgiven for taking an alternate route now that your financial nut is covered, there's a slightly safer path: Work part-time in a position that will enable you to continue to grow your core business while getting paid.
Go back to your current boss and ask for a less-than-full-time position. Get fifteen more hours a week to dedicate to your new venture while hanging onto the security of a weekly paycheck and health benefits. If it's not possible, find an employer who's down with your proposal. This move will keep you on a cash flow positive trajectory while allowing you to grow your business and hire employees (and you still won't have to surrender equity). As an added bonus, you'll have the security of knowing that if the business fails, you have a backup plan.
Keeping a second job also stacks the deck toward a successful transition to full-time entrepreneur: the longer you're able to keep your overhead low, profit growing, and personal needs covered, the more likely it is that you'll have the necessary cash cushion to make (and survive) the leap to full-time.
Taking the Leap
Now, you're profitable, you're cash flow positive, and you've got a growing equity line on your balance sheet. You even have a few people helping you build the business and you've got appreciable savings in the form of retained earnings.
It's time to throw caution to the wind and become a full-time entrepreneur. Go ahead and quit your job. That big cash pile is your safety net, and your existing (and growing) client base should ensure you never have to use it.
Even at this stage, don't spend money faster than the business can generate it from gross profit. Your personal financial needs are now a burden on cash flow, so keep them small and static. Keep overhead low, hiring only when you can afford it, and don't think that it's time to make big, bold moves.
Continue to think in steps. Add additional capabilities and overhead only when they're absolutely necessary (and well-covered by earnings), and always leave room for error. When you've made an investment in future growth by adding to the fixed costs of the business, give that investment time to pay off prior to stacking on another costly initiative. This will keep you safe and growing.
The Turtle Approach
You should be sensing a theme here: slow is better than fast.
I was able to move from $300 (and a box of t-shirts) to a global entity not in months, but over the course of nine years. For seven of those years, I held a nights-and-weekends job that covered my personal bills, and even today I continue to keep my needs extremely modest and my demands on cash flow commensurately small.
This approach is couched in safety. Before you make any move, be certain that you'll continue to do business in its aftermath. Gains in the health of your enterprise are not the stuff of days and weeks and months; they come from the consistent application of prudence and the incremental pursuit of growth over the course of years and decades.
If you're looking to make the leap from part-time business owner to full-time entrepreneur, obey these rules:
Push the business as far as it will go in a near-zero overhead environment before adding fixed costs.
Keep your salaried and benefited job as long as possible.
Add employees one at a time, and do it before you give up the safety of your salaried position.
Avoid surrendering equity.
When you do add overhead, do it only when the pain of the existing structure becomes truly unbearable, and you can no longer grow without making a change.
Even then, add overhead in the smallest possible increments. Do not buy a mansion if a trailer will do.
At some point, you've got to go full-time. Do it when the safety net is deep and cash flow supports current operations.
Once you've made the leap, continue to be prudent, focusing on consistent, incremental growth rather than a moonshot that will put your survival at risk.
You'll notice that these rules fly in the face of today's entrepreneurial zeitgeist, a culture that encourages big risk taking and do-or-die moves. While the entrepreneur-as-hero archetype is close to my heart, it gets a few things wrong, starting with the idea that it's okay to fail. Odds are, you'll only take one shot at moving from employee to full-time entrepreneur, and you'll want to get it right the first time.
Avoid failure at all costs.
To do so, take a step wise approach to success, establishing security before moving forward. It may be slower than alternative approaches, but it will get you there every time.
If you're in the gym business, and you'd like to put some time into making yourself a better entrepreneur, consider attending an AF Project 1.0 Seminar. During this FREE three-hour Seminar, taught by yours truly in cities all over the United States, you'll learn to use metrics and financial data to build a better business, and you'll walk away with a concrete plan to grow your gym. To learn more (and for dates and locations), click the button below: