How to prepare financially for going into business for yourself

Having a clear understanding of what you could lose and coming to grips with how much you are willing to risk for a business can reduce your stress level considerably.  The following four tips will help you to achieve this.

  1. Divide your personal assets into “touchables” and “untouchables.” Put assets such as your home, automobile, and approximately 50% of your personal savings (including RRSPs) into the “untouchables” group.  Place the remainder into the “touchable” group, which are the assets you are willing to risk on a business.  You might wish to modify these groups and percentages to suit your own situation but it is important to do the exercise.
  2. How much personal liability are you prepared to expose yourself to?  Assume the worst situation possible and stick to that limit.  Wherever possible, limit your personal liability on any loans or lease agreements necessary to buy or operate the business.  In some instances, you may have no alternative but to provide a personal guarantee if you wish to buy a business; however, it may be possible to either limit the guarantee amount or have an agreement that the guarantee is removed or reduced after a certain period or upon the occurrence of other events (for example, a certain amount of the loan has been repaid).
  3. Consider the situation from a risk-benefit perspective.  The prospective benefits must far outweigh the financial risk.
  4. Talk to your accountant and lawyer about how you might shield some of your personal assets from potential business liabilities.  Any actions to protect your personal assets must take place before you incur any debt.