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Giving up a secure salary to start a new business

Handing over keys.

karen roach/

At mid-life, with two teenage sons planning for university, few people would consider a career change, let alone start a new business, but John Bailey has always wanted to go off and do his own thing. So when Direct Energy ended a major contract with his company, Complete Energy Management, a partnership focused on home improvements, he bought a Two Men and a Truck franchise in Toronto and went into the moving business.

Nearly three years later, the 48-year-old admits the transition was tough financially on his family, who weren't used to being in such a tight position. Mr. Bailey went from making an annual salary of $80,000 to living on about $30,000 in savings from his previous business. His wife earns additional family income by working part-time at Zellers.

"It's hard to take money out for the first year because you're trying to keep money in for your overhead and to carry your costs," says Mr. Bailey. "My wife and sons have been very supportive and believe the business will be successful, given time. Besides having to cut down on home expenses, it's been hard for them because I spend a lot of time growing the business, but once it gets going, I'll be able to take more time for my family and enjoy life a bit more."

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While the first three years are generally the hardest for any new venture, Mr. Bailey says that this year has been very profitable. Even though he doesn't draw a salary, he has taken dividends out of the business so he shows an income.

"I was very lucky to be successful within the first two years," says Mr. Bailey. "Some of the other [Two Men and a Truck]franchisees have been struggling for over five years, but I'm not worried. Entrepreneurs don't think that way. It's a good business where you can make a lot of money if you're set up properly and have good business sense."


Why a franchise?

Mr. Bailey says that, while the franchise company doesn't offer financial help, he can get support if he runs into a problem. For example, they helped him at the beginning by personally guaranteeing for his trucks.

Personal debt load

In order to raise the financing needed for the franchise, Mr. Bailey set up a $300,000 line of credit on the family's home, as well as going into debt a little further.

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"I'm just starting to pay that off," says Mr. Bailey. "It's very manageable now."

Financial planning before launch

Mr. Bailey has registered retirement plans for himself and his wife, plus investments for the kids through registered education savings plans bought over the years to pay for university, and "a bit of savings" towards that, as well. Once he started the business, he was no longer able to continue to contribute to those RSPs or RESPs. Because the business has taken up so much of his income, there is little income for him to diversify.

The future

If the business did fail, he's confident he could "pretty much go anywhere" with his credentials and work. But he is optimistic and has just bought two more franchises of Two Men and a Truck to expand his business.

"It cost me money for the two territories but I'm still going to operate out of one office," says Mr. Bailey. "I'll probably add a couple more trucks in the spring if I feel it's necessary for the growth of the business. Other than that, it won't increase my debt load more than it already is."

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Gordon Stockman, vice-president of Efficient Wealth Management, a financial planning company in Mississauga, sees many clients at this age trying to determine what they're going to do with their future. He doesn't see 45 as "a late career stage" because it's still early enough to be able to get a great career in.

"John Bailey potentially could do this for 25 or 30 years if he loves doing it," says Mr. Stockman, who believes Mr. Bailey's confidence is his No. 1 attribute. "We don't need to be worried about retiring at 55 or 60 if we love what we do."

Mr. Stockman says Mr. Bailey should focus on making his business successful, as opposed to hammering away on how much money he needs to save. He recommends that John have an accountant who is forward focused, as opposed to rear focused, because he's trying to build his business.

"He has to find that difficult balance of how much he keeps in his business and how much is external to his business," Mr. Stockman says. "The more external savings he has, the less he's able to grow his business. It's a fine line and that balance has to be respected and discussed on an annual basis."

"John's wealth is represented by more than his RSPs or his savings account," adds Mr. Stockman. "His whole future is wrapped up in his business so he now has to see himself and his company as a blended financial future. The success of his company is going to be the success of his personal finances."

Financial planning before launch

Mr. Stockman says it's critical that people first do an exact evaluation of their financial situation before quitting their job and taking the leap. Have a business plan up front and a clear understanding of how to make that business plan work for the initial three years.

Then have a second plan that offers an alternative if the first one isn't successful.

"Not everything works out," Mr. Stockman says. "The ability to take out salary and the need to invest in the business will be greater than people anticipate. That's the time to bring your financial planner and accountant together to decide how to do this. Then ask, has your lawyer ever met and talked to those two other people? And does your spouse know any of them? This is very important."

One advantage of starting RSPs early is that if you need to take a break for a couple of years when you can't put money away, it won't matter, explains Mr. Stockman. The money in your RSPs isn't only for retirement, it's about the freedom of being able to take a break in those crucial years when you're going to make a career change or your children are going to university.

The first three years

"John is a great story because he put his personal finances on hold for a couple of years and that's a very valid thing to have done," Mr. Stockman says. "When I'm counselling people, I like to play out how they will make it through the first three years without having to get out of the business that they just entered because they don't have the financial capability to see it through.

"The reality is, when you open up a business, even if there's a profit, it needs to go back into the business to keep the momentum going. Many people aren't realistic about their ability to take out cash flow in those early years. If you make it for three years and have a decent business model, you'll find some success."

Red flags

Mr. Stockman was concerned about Mr. Bailey being turned down for disability insurance because he didn't have earnings.

"Sometimes things are easier to put into place before you're out there with lots of borrowed money and no income trying to start up a business," says Mr. Stockman. "John should have put that into place before he started his business, as opposed to after."

Another issue was that Mr. Bailey was using his personal line of credit to pay his bills because the company wasn't paying him any money.

"From a tax perspective, we'd rather the business had the debt so that it clearly was tax deductible," says Mr. Stockman. "Where that debt lies is an important issue."

The future

Becoming an entrepreneur changes how you save for the future because, unlike a salaried person who has RSPs, your business represents a retirement, too, depending on when and how you want to quit work, explains Mr. Stockman. But you can't tie it all up in the business because the business can go under suddenly. You have to find a balance between keeping money in the business and external to the business.

Another important consideration for the future is that Mr. Bailey be able to stay in the office, as opposed to going out on the trucks and doing physical labour, as this would limit his ability to run his business.

"As long as John has a management or ownership role, he can do this for many years," says Mr. Stockman. "In later years, John can slow down, become an owner only and hire a manager, although that will reduce his revenue."

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