Ten Factors to Consider Before Jumping into Independent Consulting

/

Being a self-employed consultant or “solopreneur” isn’t for everyone. Sure, it sounds fabulous – be selective about which jobs you take, have a flexible schedule, escape office politics, make really good money – but it definitely has some drawbacks. I made the leap to independent consulting in 2004 and never looked back. Although I made more money while working fewer hours, I also had to learn how to run my own business. Now I run a national talent agency for HR consultants as well as the Professional Independent Consultants of America, both organizations that help independent consultants be successful. Consequently, I’m frequently asked to help people think through the decision of whether or not “go independent”. Here are ten things to think about before taking the leap to become an independent consultant or solopreneur. (Corresponding worksheet here.)  

1.    Money management

·         Cash flow – This is probably the hardest part about being self-employed, especially if you are going to work with large companies. Corporate payment terms are typically “net 45” or longer regardless of the size of your invoice. This means that if you work 100 hours in January and bill for it on January 31st, you probably won’t see any cash until the middle of March.  Also, your cash flow is likely to be erratic, depending on the type of work, the duration of your projects, and your ability to get new projects. In my ten years as an independent consultant, my pre-tax income ranged from $5,000 to $28,000 a month. You need to be able to pay your bills in good times and bad. Do you have a safety net?  

·         Taxes – Being self-employed means making estimated tax payments four times a year. This means you have to:

  • Figure out how much tax to pay

  • Have fairly large amounts of money available to make the payments, and

  • Remember to make the payments to avoid penalties.

My personal tax payments as an independent consultant ranged from $8,000 to $24,000 a quarter.  Also, there’s a chance that you will pay more in tax when self-employed since you’ll have to pay “self-employment tax”; this is the portion of Medicare and Social Security tax that an employer usually pays on your behalf. (The tax rate for self-employed individuals is 15.3% of net income. More info at NerdWallet.) This self-employment tax can easily be an additional $10,000 in tax. That said, if you keep good financial records and contribute to a solo 401(k) or SEP-IRA, you can pay less in tax when you are self-employed if you earn more than $100,000 per year. (Short video: Why Friends Don’t Let Friends W-2TM) The key point is that taxes are a real pain when you are self-employed. Are you disciplined and organized enough to deal with it four times a year?

·         Retirement – Although saving for retirement is a big tax benefit when you’re self-employed (Self Employed? Lower Your Tax Bill), having the money available to put into a solo 401(k) or SEP-IRA can be a challenge, given the problems with cash flow and taxes mentioned above. My trick was to have a separate savings account just for taxes and retirement. Every time I received a payment from a client, 40% of it went into this special savings account. Not only did I always have enough cash for quarterly tax payments, I typically had about $20,000 left over to put into my retirement account (which also lowered my taxable income by $20k).

2.    Dealing with uncertainty – Depending on your area of expertise and price point, you may always have plenty of work or you may have to go a few months between projects. (See the point above about erratic cash flow!) Can you handle the stress of not knowing where your next project or client will come from?

3.    Prior consulting experience – Just because you are really good at what you do doesn’t mean you will be a successful consultant. A lot of consulting boils down to contracting effectively (clarifying scope and estimated effort), managing expectations, and being an exceptional listener. Have you ever worked as an internal consultant for a company or as an external consultant with a consulting firm? People who leave regular corporate jobs often have a harder time transitioning to life as an independent consultant than those who have prior consulting experience.

4.    Getting started

·         Cash flow – It’s likely to be at least two months before you have any income (most likely longer). Do you have the cash to make ends meet?  You have to give yourself some time to build momentum. I recommend that you plan on at least four months with no income.

·         Mental outlook – If you’ve just been laid off from your full-time job, that may be the best time or the worst time to strike out on your own. Being laid off with a severance package can help ease the “start-up cash flow crunch” or it can be demoralizing. It takes a lot of confidence and energy to be successfully self-employed so be honest with yourself. Are you mentally prepared to start your own business? Are you feeling confident?

5.    Getting new projects – Business development is a common challenge for most independent consultants and solopreneurs. One way to get over the psychological hurdle is to avoid calling it “sales”. I managed to do quite well for myself by constantly networking, even when I was working over 40 hours a week on a client project. In my mind I’ve never done any “business development” but new clients and projects always seemed to come along. Reflect on these questions:

  • How healthy is your network? For example, most successful independent consultants have over 500 connections on LinkedIn.

  • Are you good about keeping in touch with former colleagues or clients?

  • Do you connect with people just to say hi, or do you tend to reach out only when you need a favor or are looking for work? 

  • Are you comfortable reaching out to nearly everyone you know to tell them that you’re going out on your own?

Be honest with yourself. If it’s fairly easy for you to keep in touch with people you will have an easier time getting work.

6.    Supply and demand – Assess the market for your expertise to get an idea of how hard it may be to find work. Consider these two examples:

  • Leadership alignment / strategic off-sites – Most companies can’t afford to have someone on staff to do this, or their existing staff doesn’t have the skills, bandwidth or right relationships with the executives. There’s likely some demand for an external consultant who specializes in this work.

  • Executive coaching – There are literally thousands of coaches in any given metropolitan area so there a lot of supply. Will you be able to stand out?

Think about your expertise while thinking through these questions. Is there a lot of demand for what you do on an interim basis? Is there a lot of supply (people) who do what you do as well as you do? Is what you do something a company is likely to need an external consultant to help with?   

7.    Marketability – Were former bosses, colleagues or teammates sad to see you move on to a different department or project?  Do clients, project managers or colleagues ask you work with them again and again? These can be indicators of getting repeat business or referrals. In my first eight years as an independent consultant I bounced back and forth between two primary clients; they kept calling me back to help with something else. This helps to ease the pressure of constantly doing business development, networking, or “sales”.

8.    Benefits – State-sponsored health exchanges have made it possible to get health insurance on your own, but it’s still expensive. Obviously if you have a spouse or partner with company-sponsored health insurance this is less of a consideration than if you have to pay for it yourself, but if you have to buy your own insurance, will you be able to afford it?  Can you manage a higher deductible and possibly reduced coverage?

Another drawback to being self-employed is that there is no paid time off. In fact, vacations are twice as expensive because you have to pay to go on the vacation and you also have the opportunity cost of not working while you’re on vacation.

9.    Work ethic – It’s true that as an independent consultant you’ll have flexible schedule but the hours can also be erratic and demanding. Depending on the type of consulting you do, you may be a slave to the client’s timeline or deadline. The best consultants (the ones who get referrals and repeat business) do whatever it takes to get the job done and/or keep their word. Are you the type to stay up late or work on a weekend to get a job done, or are you more of a 9-to-5 person?

10.  Job fulfillment – Over the years I’ve seen professionals get all excited about being a consultant, only to see them bounce pack to a full-time job nine months later. Sometimes it’s because they get an offer they can’t refuse, but sometimes it’s because they miss the intangibles of “being on the inside.” Do you really like being part of team?  Do you like mentoring others? Do you like seeing how your efforts play out over time?  If any of these true for you, a “real job” may be more fulfilling.

As with any career choice there’s a lot to consider, but with the move to independent consulting there’s a lot of risk too. If you’re considering it, perhaps the most important thing to ask yourself is this: Are you committed to this as a career choice, or is it something you’re going to try until the right “real job” comes along?  If the former, you have just increased your odds of success!

~ ~ ~ Additional Resources ~ ~ ~