Topic: Wealth Management

Investor Toolkit: How to overcome the odds and get rich with your own business

September 17, 2014|by Pat McKeough

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Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investing advice on the widest possible variety of topics. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice.

Today’s tip: “There’s a high failure rate for those who start their own businesses, but if you know how to make the right choices, it’s still your best chance of getting rich.”

You can still get rich as an employee of a company—ask any highly paid executive of a Canadian corporation. However, high-paying jobs are hard to find. Most corporate structures are pyramid-shaped, with a few high-paying positions at the top and many lower-paying jobs down below. And, with the economy growing slowly and unemployment remaining relatively high, many people continue to vie for higher-paying jobs.

You may improve your chances of getting rich by investing in your own business. But this is a risky proposition. Many new businesses wind up failing. As many as 80% go bankrupt or simply shut down in their first five years, according to a number of surveys. Of five-year survivors, as many as 80% fail during years six through 10. Owners of failed enterprises may lose their life savings, and even their homes and marriages.

Today, we look at the risks of going into business on your own. We also spell out the steps you can take to improve your chance of success with a start-up business.

Why new businesses fail:

• Owners underestimate the amount and variety of work. In a small business, everything is your job, until you hire somebody to do it. Even then, you still have all of the responsibility.
• Shortages of capital and the difficulty of building a reliable source of cash flow. In many failures, the owners simply ran out of money to pay their bills before the company’s profits begin to flow.
• Some “bright idea” businesses fail because there’s no real demand for their product or service.

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How to improve your chances of success:

• Keep your job and run the business on the side until it starts making money.
• Make sure you have adequate capital. Apply for loans, lines of credit, merchant charge-card accounts and so on before you need them.
• Choose a “me-too” business over a pioneering one. Improve on existing products or services, or buy a franchise.
• Make it your life’s work. Learn all you can about the industry, and keep learning. Plan on working long hours for many years without supervision or immediate rewards.
• Above all, stick with it. Many entrepreneurs go broke two, three or more times before they launch the business that makes their fortunes.

Note to investors: the odds against success in your own start-up business apply just as much to shares in start-up businesses that trade on the stock exchange. If anything, the odds against publicly traded start-ups are worse; that’s because some publicly traded start-ups are created by stock promoters who merely go through the motions of building a business, while their real business is selling stocks to the public.

That’s why it pays to downplay junior stocks in your portfolio. Instead, invest most of your money in well-established companies with a history of sales and earnings, if not dividends. That’s why we focus on well-established companies in our newsletters: they put the odds of success in your favour.