A surge of entrepreneurship in the country started in 2020 during the pandemic and shows no immediate signs of slowing. The trend has left advisors fielding more questions about what it takes when starting a business.
Lindy Venustus, CEO and founder of Create Financial Planning, said that her No. 1 recommendation for individuals considering entrepreneurship is to plan to have three years of living expenses saved.
“This sounds a little extreme,” she said. But, Venustus advises this as “it may take three years to start to be profitable” as a new business.
She also recommends that entrepreneurs still have a source of income they retain. Later, they can “start to wean [themselves]off” of it.
“Something that doesn’t take up all of your hours, or drain your energy,” Venustus said.
Future business owners should also research the competitive landscape of their industry.
“If you have competitors, really understand what they are doing — what their power is, what their pitfalls are. Understand how you are different or the same, so you can position yourself on why people should want to work with you and [so]you aren’t dependent on pricing,” as a differentiator, she added.
Since the pandemic, Venustus has seen an increase in people, particularly women, making the leap to entrepreneurship. She believes part of that migration is due to layoffs across industries. However, Venustus also thinks it’s because of a shift in perspective as people “want to find a vocation that feeds their soul more.”
“Usually the job with the big paycheck isn’t doing that. It’s more stress, rather than creating a true sense of being and happiness,” she noted.
An Ongoing Wave
While 2020, when widespread COVID lockdowns in the U.S. began, was a record year for entrepreneurship, evidence shows that the wave continues. In fact, as of midyear, monthly applications for new businesses (that were likely to employ other workers) were more than 30% higher than in 2019, a report by economists at the Federal Reserve and the University of Maryland found.
“The pandemic sparked rapid, dramatic changes to the composition of consumer demand and to preferences for work and lifestyle, and these patterns have continued to evolve through mid-2023,” stated the paper, which was presented to the Brookings Institution in late September.
“Entrepreneurs made plans and applied to start businesses both early on and through mid-2023; some of these plans have resulted in new firms and establishments that hired workers in large numbers. Entrepreneurial opportunities and the demand for employees at these new firms appear to have played an important role in the ‘Great Resignation,’ as some quitting workers likely flowed toward new businesses (as either entrepreneurs or new hires),” the paper stated.
As a CFP, Venustus has encouraged entrepreneurship among certain clients. That’s because she saw them as having “a special skill set,” as well as “good savings, or maybe a supportive partner.”
Nick Reilly, founder and wealth advisor at One Day Advice, also says he has seen more interest in entrepreneurship recently. He believes it is partly due to many companies requiring workers to be in the office three or four days per week.
“People are definitely looking for more work/life balance,” Reilly said.
Healthcare & Other Insurance Needs
A top concern of those wanting to become their own boss is healthcare. They worry about costs and available options once they’re no longer covered by employer-sponsored plans.
Reilly noted there are federal or state health insurance marketplaces that offer health and dental insurance options for those not covered through an employer. However, he says individuals can also seek out group plans through affinity or alumni organizations offering discounted rates.
For individuals with higher-than-average health costs, Reilly suggested they may need to just purchase a higher-premium plan.
“If they are in a health situation where they have some previous conditions, or they are prone to health issues, part of the de-risking [strategy]may be you paying higher premiums, to reduce the potential out-of-pocket costs,” he explained.
In 2023, the average benchmark premium for an individual covered through the government’s health insurance marketplace was $456 per month, according to data from the Kaiser Family Foundation. That figure is expected to increase to $477 per month in 2024, or $5,724 annually.
In comparison, in 2023, a single person with employer-sponsored health coverage had to pay an average contribution of $117 per month (or $1,401 annually) toward their health insurance premiums, KFF data shows.
Before starting a business, Reilly’s biggest recommendation to individuals is that they de-risk their own investment portfolio.
“They have to accommodate for taking on more risk in their own business. That way they have more funds available, and have more security going into that business venture,” he said.
His second recommendation would be to have enough emergency funds, or liquid assets, that they can still “qualify for a better line of credit [loan]or interest rate.”
“Those kinds of opportunities will be harder once they’ve left that W-2 job,” Reilly added.
When weighing healthcare options, Venustus said that individuals should consider speaking with an insurance broker, rather than an insurance agent. The broker likely will have access to multiple insurance companies and their offerings.
“As a business owner, something they may need to look at is whether they need to have any type of liability insurance for their home, office, or vehicle, that wouldn’t extend from their typical renter’s, auto, or home insurance,” she added. This would be in cases where they work from a home-based office or maybe use their car for work purposes, such as transporting their goods or making deliveries, Venustus explained.
Prospective business owners should also know whether their industry requires them to have certain professional liability insurance in order to practice.
Regarding insurance, Venustus said that individuals “need to understand what is personal and what’s business. If there is an accident, and someone is injured or there are damages, is that covered?”
Planning for Retirement
Regarding a plan for retirement, she recommends that business owners “pay themselves what they are worth.” Then they aren’t too heavily reliant on selling their business at a certain price, if that is part of their exit package.
By paying themselves an adequate salary, they are ensuring their retirement plan “isn’t just selling the business, and expecting someone is going to pay a giant [lump sum],” Venustus explained. “This is so you’re not left with an unreasonable price tag at selling.”
For business owners with partners, they might also consider a life insurance policy. That could help the remaining owners to buy the decedent’s stake in the company.
“That’s so they can buy that ownership stake from your estate,” she said.
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