When Severance is Your Seed Money

How to best use that sudden stash of cash to become your own boss.

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By Eileen P. Gunn

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It's a scene that's been played out all over America in the past few years: companies handing out severance checks, often to their most highly paid, experienced employees. For some laid-off workers, it becomes the push into entrepreneurship they've needed -- maybe even wanted. Those severance checks can be used as seed money, funding everything from one-person consulting shops to retail franchises. Here, four tips to help you launch your dream business, while minimizing the risk to that sudden stash of cash.

No. 1: Don't leap before you look.

More than anything else, severance provides money to live on while you answer basic questions for your business plan: What will it cost start? What will revenues be? Who is your customer and how will you reach him? When will you pay yourself a salary?

"You need to figure out if there is a business opportunity here or just an idea," says Jonathan York, director of the Center for Innovation and Entrepreneurship at California Polytechnic University in San Luis Obispo, Calif.

You must also accept that researching and launching your business is your new job -- and act that way. Set up headquarters at home (that is, a corner of your bedroom or kitchen with a computer and your cell phone). Dress as if you're going to work. Talk to people and go online, or to your nearest business library, to research your industry and competitors.

No. 2: Act now. Don't wait.

Lou Warren spent a year job hunting after he was laid off as a manager at a plastics company in Kansas City in 2008. He explored other options but jobs were scarce. Then he decided to use about half of his severance to open a Senior Helpers franchise, which places caregivers in the homes of senior citizens. He turned a profit in September of 2010, after nine months in business. In retrospect, he says his biggest mistake was to spend an entire year looking for a job, instead of exploring his entrepreneurial options early on.

"I could have invested [my severance] earlier instead of living off of it. We would have had more money to play with and could have considered different options," says Warren, noting he could have purchased two franchises instead of one, for example. "We could be twice as profitable as we are now."

No. 3: Set a personal budget.

Before creating a business plan, figure out how much severance you'll need to live on for at least a year, ideally two, according to York. Also consider whether you can supplement that amount with unemployment insurance, other savings or part-time work.

For example, Warren's business is in the black -- and it happened a few months sooner than he expected -- but he's still putting more into it than he is getting out and supplementing his income with savings. He expects to be doing so for at least another year.

In the mean time "we scaled back lifestyle wise," he says. With his corporate job there were long weekends, trips to visit the grandkids and business trips where his wife tagged along. "We still do that but not to the extent we did before," he says.

Remember to look for ways you can cut back, too. "You want to extend the runway as much as you can because it will take longer than you think," for your business to become self-sustaining, according to York.

No. 4: Don't overspend.

Mike Faber, in Boulder, Colo., had to adjust his mindset when he lost his job as a wealth manager and launched a coaching and speaking practice. "When you're used to having that supply closet and then things you need no longer magically appear, you're surprised to see what things cost."

Faber spent several hundred dollars on business cards, stationery, promo photos and envelopes that he never used because he quickly realized that his original business name, Fabercom, was "terrible" and the corporate image was all wrong.

He ultimately changed the name to Aloha Leadership, donned khakis and colorful shirts for his speaking engagements, and stopped carrying business cards because "with what I do it's important to follow up with people in a more personal way."

Faber gave the stationery to his kids' preschool, something he jokes about now that those pricey lessons are behind him. "Three-year-olds were drawing on Fabercom stationery for years."

Eileen P. Gunn

Eileen P. Gunn is a freelance writer in New York.

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