Although a lot of entrepreneurs jump into their first business full-time, the reality is that most small business owners start their businesses while still working for someone else. A decision many entrepreneurs have to face at some point is when they should quit their job to pursue their entrepreneurial activities full-time. Unfortunately, for a lot of people, they make the decision from an emotional point rather than a logical one. In this post, I’ll be sharing some things to consider when faced with the dilemma.
I’ll assume that your business is already profitable and that you’ve been setting aside some of the income. How much savings you should have depends on your circumstances and responsibilities. Have a look through this list and see which situation is a best fit for you:
A. You live with parents and your financial contributions to the household are minor
This was my situation when I got started in my first real business when I was 21. I suggest in this case to have savings that will cover debt repayment (including student loans) and any personal expenses for at least 3 months. If you drive, you should have additional emergency funds to cover any major repairs that may occur – or at least your deductible in the case of an accident.
B. You live with a spouse or significant other who earns enough to cover household bills
Again, have sufficient funds to cover personal expenses and debt repayment for at least 3 months.
C. You live alone and are responsible for all bills
Calculate what your cost of living will be (including debt repayment) for 6 months. Deduct any guaranteed income you’ll be receiving through your business over the next 6 months (accounts receivable, contractual payments, etc). If the result is negative, fantastic! But you should still put aside savings to cover at least 3 months of (net) lost wages. If the result is positive, multiply by two. This will give you a good buffer in case things don’t work out as expected.
D. You are the primary breadwinner in your household
If you have a spouse and/or others who are dependent on you, I’d suggest having a minimum of 6 months of your current (net) wages put aside before taking the leap. This assumes that your current wages are more than sufficient to cover your normal expenses and debt repayment. You should also have an emergency fund to cover potential housing, automotive or other issues.
2. Health Insurance & Other Benefits
Depending on where you live and your personal circumstances, the loss of health insurance and other benefits may be something you want to take into account. When I took the leap, I was able to transfer my company health insurance coverage to a private plan. It did cost twice as much as what I’d been paying, but it saved me some hassles. Independent coverage can be very costly and take time to get processed. You may want to research different group insurance plans. The key here is not to let the research and decision making until after you’ve quit your job. I’ve seen some people who took the leap who were shocked to find out pre-existing conditions meant that their premiums were a third of their cost of living. Even if you are healthy, this isn’t something to overlook.
3. Stress Level
I wish I didn’t have to include this. It would be great if anyone wanting to take the leap to running their business full-time had the savings and everything in else in place before doing so, but it’s not always realistic. One common reason some people choose to take the leap ahead of time is simply because of the stress level associated with their day job. This is tricky. You don’t want to sacrifice your health because of stress, but if you leave your job too soon, the lack of income stability can make the stress worse and not better. For this reason, I’d still recommend having a cash safety net in place, but if your stress level is impacting your health, you may decide to make your cushion a smaller one.
4. You Catch a Break
There are situations where an entrepreneur gets a break of some kind that almost necessitates taking the plunge.
I remember hearing of one entrepreneur who quit their day job after being booked on Oprah. You may get a big contract or something similar that would require you to work on your business full-time. You could get a huge amount of cash in. My partner at Domainate.com left his day job after making a $60,000 sale (which was mostly profit). Obviously, if the money is guaranteed, that makes the decision of quitting your day job an easier one. But if it’s not, you’ll need to weigh out your situation appropriately.
5. Threshold Business Income
You should also factor in the money your business needs to be generating on an ongoing basis for you to cover your bills and maintain your standard of living. If your income has been at a certain minimum for 3 or more months and you expect it to continue to be at least that much for the foreseeable future, it should make the decision to quit your day job much easier.
One warning on this: if 50% or more of your revenue is from one source, you may want to be extra careful and make sure your savings nest egg is maximized.
There are, of course, other factors to consider when considering when it’s the right time to quit your day job but these are the major ones. Good luck to you!
Disclaimer: the contents of this post are for informational purposes only. Please seek appropriate legal or accounting counsel for advice specific to your situation.