Before you strike out on your own, make a game plan and get your finances in order. By Laura Cohn, Associate Editor September 1, 2009 Talk about bad timing. Just before Shannon O’Brien left her CEO position, the construction firm where her husband worked went bankrupt. So early in 2008, O’Brien and her husband, Emmet Hayes, both found themselves unemployed. But instead of rushing back to the relative safety of corporate jobs, O’Brien and Hayes decided to parlay their work experience into start-up businesses. O’Brien, 50, is a former Massachusetts state treasurer who ran for governor in 2002 and who had just resigned from heading the Girl Scouts of Greater Boston. She decided to satisfy her entrepreneurial streak and use her expertise to advise renewable-energy companies on how to fund-raise and cut red tape. Hayes, 58, a former state legislator and director of business development for his bankrupt former employer, joined two fellow veterans of the state capitol to found a law firm that does lobbying and consulting.O’Brien and Hayes had some early gut checks, especially given the slumping economy. “For a time the two of us were saying, “Holy cow, what have we gotten ourselves into?””says O’Brien. But their savings helped them through the lean times, and now both of their enterprises have started to take root. The couple aren’t alone. With job security sagging even in traditionally stable industries, many Americans, by choice or necessity, are leaving the corporate cocoon to start their own businesses. Brian Headd, an economist at the Small Business Administration’s Office of Advocacy, says that the number of one-person operations rises when the economy is struggling. For instance, in 2007, the year the current slowdown began, the number of such firms increased 4.5%. They don’t all make it. Of the more than 600,000 companies started in the U.S. each year, only about half will survive for five years or longer, says the SBA. How do you make sure you’re among the winners? Start by laying out your plans carefully and getting the best advice you can from other entrepreneurs and experts in the field. Advertisement That’s what O’Brien did. She knew she was interested in renewable energy, having made it part of her platform as a candidate for governor. But she wasn’t sure she could carve out a full-time job in the field. So she touched base with New Directions, an outplacement firm that caters to senior executives. Through its seminars, group discussions and one-on-one meetings, New Directions guided O’Brien to the resources she needed to confirm that her idea could fly. She found that start-ups, such as Free Flow Power, a hydropower firm that is now a client, had ideas and energy but needed help to raise money from public and private sources. And she found another key ingredient: passion. Working in clean energy “gets me revved up every morning,” she says. Do the Legwork Passion and a market for your services are just the beginning. Before investing real money, you need to focus your plan by finding out everything you can about the sector, and by analyzing competitors’ pricing and marketing. That kind of legwork paid off for David Miller. After toying with the idea of starting a Web-based fantasy-sports game aimed at families, Miller, 36, attended the annual meeting of the Fantasy Sports Trade Association. He left the meeting convinced that his idea was a good one. By networking and doing research, Miller found that 40% of National Football League viewers are women. So, as he suspected, he could attract women to his site. That was a crucial insight because women tend to control the family budget, and he figures sponsors and advertisers will want exposure to those women. “There’s no reason fantasy sports should just be for dorky guys,” says Miller, who lives in Bethesda, Md. Miller launched FamilyFantasy-Sports.com in June 2008. Having studied entrepreneurship (he’s working on a PhD in the subject), he knew that a start-up was more likely to succeed when it’s a partnership. So Miller enlisted a friend who lives in Cincinnati. He and his partner dipped into their savings to finance the site, and together invested in the “low six figures” over a period of two years. Advertisement They also avoided a big mistake often made by entrepreneurs: They didn’t blow their budget on fancy offices or expensive marketing campaigns. To keep costs low, neither pays for office space, and the company has relied on social-networking sites, such as Facebook and Twitter, to gin up interest. Through Twitter they got on a local radio program, which eventually landed them a deal with a sports-merchandising company that provides prizes on their Web site to winners of competitions. Miller and his partner hope to break even this year. Write Your Plan After seeking advice and doing your homework, write a detailed business plan. It may sound daunting, but the exercise will help you shape your idea. If you need help, seek out your local office of Score (www.score.org). Score, a nonprofit partner of the Small Business Administration, has more than 11,000 counselors who mentor small-business owners on every aspect of starting a firm, including writing a business plan. After that, suggests Jeff Redmond, senior partner at New Directions, set up a focus group to get reactions to your idea. Such feedback was key for Sara Polon, who last year launched a company that sells soups made from locally grown ingredients. Polon, a comedienne-turned-project-director at a Washington, D.C., travel business, says that working in an office made her “feel like a caged animal.” After reading Michael Pollan’s book on American eating habits, The Omnivore’s Dilemma, the 32-year-old decided to jump into the local food movement by starting Souper Girl. In the depths of the recession last summer, Polon kept her old job but held a series of tastings with her friends to see if her recipes were any good. Once she had a list of 50 vegetarian soups that passed muster, she invested $11,000 of her savings in a catchy Web site (www.thesoupergirl.com) and kitchen equipment. Advertisement Then she got to work. Polon rented kitchen space at a local restaurant that needed extra cash, enlisted her energetic, 65-year-old mother to help (Polon says she was raised on soup), and spread the word. Polon’s venture was profitable from the start. She says she made back her initial investment within four months. Her soup, which sells for $12.75 a quart, comes with witty labels. For example, there’s “Ice Ice Vichyssoise Soup.” Polon says she is attracting so many orders that she is about to hire her first full-time employee. “I’ve never worked so hard in my life,” she says. Line Up Your Finances Not everyone can dip into savings to fund a start-up. If you need a loan, your best bet is a small community bank or credit union, where you’ll need a business plan to make your case to the loan officer. The economic slowdown has made lenders stingier, but the stimulus package provided the SBA with $730 million. Part of that money will be used to expand the agency’s micro-loan program, which grants loans of up to $35,000 to new or expanding small businesses. The stimulus bill also boosted the SBA guarantee on bank loans, to 90% from 75%, helping spur lenders to issue money more freely (to find a bank that offers SBA loans, check the “Local Resources” section of the agency’s Web site, www.sba.gov). To cover your personal expenses while your business gets under way, you should have six months’ to a year’s worth of money in reserve. Advertisement Health insurance. This can be a challenge, but it may be easier to find coverage than you think, especially if you’re healthy. Souper Girl’s Polon, who has her own health insurance, pays about $150 a month to participate in a Blue Cross HMO. To get a sense of what’s available, check eHealthInsurance.com or Coverageforall.org. Another good source is the National Association of Health Underwriters (www.nahu.org), which will help you find a local agent. Also check with your industry’s trade group. Some associations, such as the California Association of Non-Profits, offer group health plans. If you’re a veteran, check to see if your local veterans group offers plans. As a sole proprietor you can deduct the premiums for medical, dental and long-term-care insurance. A health savings account can also help. HSAs allow you to contribute pretax money that you can use tax-free for future medical expenses. For individual coverage, you can contribute up to $3,000 to an HSA in 2009. For families, the maximum is $5,950. And you can contribute an extra $1,000 if you're 55 or older. For a list of insurers that offer these plans, check HSAInsider.com. Financial expertise. You’ll have to negotiate a maze of insurance, tax and other financial issues, so it’s essential to get a good accountant. If you operate at a loss, of course, you don’t owe money to Uncle Sam. But if you’re a sole proprietor, every dollar of profits you make is potentially taxable. You may be eligible for more than 100 deductions, so it’s important to keep a meticulous record of what you spend on everything from advertising to travel to office supplies. Unfortunately, only owners of corporations and limited liability companies can deduct their salaries. For guidance on what’s deductible, download IRS Publication 334, Tax Guide for Small Businesses (www.irs.gov/pub/irs-pdf/p334.pdf). Also handy is “Filing Requirements for Self-Employed Individuals” (go to www.irs.gov and click on “Businesses,” then “Small Business and Self-Employed Tax Center”). Retirement savings. As a small-business owner you won’t have a corporate pension, but you can start a retirement savings plan. The main programs -- a Simplified Employee Pension, or SEP IRA, and a solo 401(k) -- allow you to sock away pretax savings. And as a sole proprietor, you can contribute more to your retirement than would have been permitted had you stayed in a corporate job. A SEP IRA is easier to set up. Owners of unincorporated businesses can contribute up to 20% of their net self-employment income, up to a maximum of $49,000 in 2009. With a solo 401(k), you can contribute even more. In addition to the 20% contribution, self-employed business owners can contribute $16,500, plus $5,500 more if you’re 50 or older. A solo 401(k) can be more attractive because you can borrow as much as half the balance (up to $50,000). A good place to sort out your retirement options is the calculator at www.401khelpcenter.com. Retirement savings may take a back seat, however, particularly in the early years of a start-up. Miller, the fantasy-sports entrepreneur, says he didn’t contribute to his retirement savings during his first year of operations, although his wife maxed out the 401(k) plan available to her as an emergency-room physician.