Top Ten Tips for Starting a Business in Canada (and avoiding bankruptcy)

July 6th, 2009 by A Licensed Insolvency Trustee

A common cause of bankruptcy in Canada are debts that resulted from a failed business. I meet many Canadians each month who started their own business, and for various reasons it wasn’t successful, and they were left with more debt than they could handle, so they had to file bankruptcy in Canada. During a recession when jobs are scarce, an increasing number of Canadians start their own business out of necessity: if you can’t find a job, make your own!

That’s a great idea, but you want to protect yourself and do it right. As a trustee in bankruptcy that has met with hundreds of Canadians over the years who have lived through failed businesses, here are my Top Ten Tips for Starting a Business in Canada.

1 Start a business doing something you enjoy. If you are not passionate about your new business, you won’t enjoy going to work, and your business will probably fail.

2 Start a business doing something you are good at. If you don’t have the skills necessary to run your business, you will fail. There would be no point in me trying to start a business as a carpenter, because I have no wood working skills. I’m not a handy man, and so even if there was a great demand for carpenters in my area, my business would fail.

3 Start a business that has a good chance to be profitable. I may be passionate about horseshoes. I may be really good at making and fitting horseshoes. But if I live downtown in a major city there may not be any customers for my service, and my business will fail.

4 Minimize risk. This step is critical. I have met with over 100 people in my career who had a product to sell, so they signed a ten year lease on a store in a plaza, bought lots of inventory, and hired staff. Unfortunately, they didn’t have enough customers, and the store failed. A better approach is to start small. Make the product yourself, and instead of renting a store, rent a booth at the local Farmer’s Market or Flea Market on the weekend. Test the product. If you can build up a customer base starting small, then expand.

5 Have a good idea. If you have created a recipe for a product you can sell, try it. If you have invented a new product, try to market it. If you have a unique product, customers can only buy from you.

6 Follow, don’t lead. This tip may appear to be the opposite of Tip #5, but it’s something to consider. Look around and find the successful businesses in your industry. Can you copy a successful business? Trying to duplicate an existing business is a silly idea; they got there first, so they have a head start. But if you can find a successful business, you may be able to modify what they do, and do it yourself. Do some research. If a business is successful in another city, you may be able to replicate it in your city. You get the benefit of their experience, without the competition.

7 Learn from other’s mistakes. Copying a successful business is a good idea. An even better idea is to learn from unsuccessful businesses. Talk to your friends that started businesses. Ask them what mistakes they made. Ask your lawyer or accountant or banker for advice. In my experience businesses that fail make the same mistakes over and over, so read these Top Ten Tips again to avoid those mistakes.

8 Have adequate capital. The number one mistake made by new businesses is not having enough money to operate. Do the math. How much will it cost you to buy inventory, set up shop, pay for advertising, and pay your monthly expenses before you start generating a positive cash flow? Whatever number you come up with, multiply it by four, because you have probably under-estimated your cash needs. If you don’t have the necessary cash, and if you can’t borrow it, either don’t start the business, or find a way to reduce your costs (see Tip #4).

9 Get expert advice. Before you start a business you should meet with an experienced accountant to help you set up an accounting system. At the very least you need to understand how to collect and remit GST, PST and all of the other “initials” that the government will want (like PST, HST, WSIB, and so on). I often meet with people who got audited by the government in the third year of their business, only to discover that they were supposed to be charging GST. They didn’t, and now they owe the government three years worth of GST, and they have no way to pay it, and bankruptcy is the result. Be smart; find out what you need to do before you start.

I also recommend having at least a one hour meeting with a lawyer before you start your business, so that you understand your legal obligations. Should you incorporate or not? Should you be a director of your corporation? These are simple questions for an accountant or lawyer to answer, but they can only answer them if you ask.

10 Protect yourself. Every business person expects to be a great success, and make lots of money. But what happens if you are not successful? You must protect yourself. Minimize risk and keep your expenses low to lessen the chance of failure. Don’t borrow money if possible; start your business with cash, not debt. The most common mistake I see involves a husband and wife starting a business. One spouse owns the family home, and only that spouse is actively involved in the business. The business fails, there’s a lot of money owing to CRA, so CRA puts a lien on the house. The couple is forced to sell their house to repay the debts.

A more sensible approach is to have the spouse involved in the business owning nothing! That’s right, if the husband is operating the business, the wife should own the house. That way, if the business fails, the creditors can’t take the husband’s house, because he doesn’t own it. Of course I’m giving an overly simplified example to make my point, so you should get legal advice (Tip #9) before changing ownership of assets. However, it’s generally easier to restructure your affairs before you start your business than it will be later when you are in trouble.

I am a strong believer in being an entrepreneur. I left the security of a job at a big company eleven years ago to co-found my own business. It was a challenge at the start. My income in our first year in business was almost nothing, and I had a family to support. But, I took my own advice, kept our costs low, minimized my risk, and in the end starting a business.was the best decision possible. Make a plan, think it through, get some good advice, and good luck!

A Licensed Insolvency Trustee

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