A 35-year mortgage is insane. Pay cash instead.
The following image is not animated. In fact, I challenge you to see this image as it really is: perfectly still. No matter how hard you try, our deceitful eyes will interpret this image in motion. Even when you know the truth, it’s impossible to force our eyes to respond to that truth.
In much the same way, we attack problems based on how we’re biologically and sociologically trained to see the world. In what appears to be a kaleidoscope of moving chaotic complexity we often overlook the simpler solutions to problems.
I’ll never be able to afford a house.
Talking with many young people, they seem impossibly challenged by the prospect of owning a home.
With the average Canadian detached house sitting at around $665,850 in June of 2022 I can understand the frustration. Attempting to get a mortgage over a 25 year period would set an individual or family back a cool $3,872.62 per month at a 5% interest rate. Assuming, of course, a young person were even able to save enough for a down payment in the midst of trying to cover the necessities of life.
The primary source of income for most individuals is salary from employment. This makes the housing challenge more daunting given the extraordinary level of federal, provincial and municipal tax we pay, with the largest portion being income tax. Canadians pay more in tax than we do for our most basic necessities required to survive like food, clothing, and shelter!
It’s reasonable that people would try to solve their housing problem by looking at their only source of income. But, it’s a slow, tiresome method of buying a house that takes anywhere from 25 to (crazy) 35 years – meaning you might finish by the time you’re 60-70 years old.
Looking at the world through a lens of equity.
Every Canadian is entitled to $913,630 in lifetime capital gains exemption (LCGE). This means that if you sell a small business (or shares in a small business *hint* *hint*), family farm, or fishery, you will not pay tax on the gains from the sale.
It seems to me $913K would still buy a fairly nice home these days, so let’s focus on the option that would be accessible to most Canadians: selling shares in a business. By the way, if you’re married, you can leverage your spouse's LCGE as well, amounting to a whopping $1.8M. Got kids? We’ll talk about that later too.
In order to sell shares in a business you first have to own shares. This is where more people need to look at the world differently.
Look at the world differently.
I’m going to start with a warning label to avoid wasting your time: if you are lazy, unmotivated, easily distracted, incapable of learning, or are otherwise “generally satisfied” zombifying yourself to a TV streaming platform (as good as Obi-Wan Kenobi was), close your browser and go back to your binge. This is not for you, it’s not a “get rich quick” scam; it’s a “work smarter and faster” financial solution. If you’re the kind of person who is ambitious, works hard, is desperate for financial freedom, and you’re eager to learn, read on.
Most people will never use their LCGE. Most Canadians don’t even know it exists. They don’t teach this stuff in schools (they could *nudge towards teachers*) and the Canada Revenue Agency is too busy hunting down delinquent dollars to offer any kind of meaningful education about their services to Canadians. An aside, because I’m easily distracted: did you know the CRA employs more people than the RCMP? 42,000 people compared to 30,000. But, I digress. One day I’m coming back to that topic and the lack of value and service we get as tax paying Canadians!
You’re probably already working 40 hours a week. Maybe you’re working 60 hours a week because you need two jobs just to stay ahead. You might even find yourself working for VISA or Mastercard for groceries you bought six months ago. You’re already working hard, you might as well work smart.
How to take advantage of LCGE.
You’re going to build a plan to start a company and one of your key objectives is to take full advantage of the LCGE. Now before you hit the back button while rhetorically discouraging yourself with a “I can’t do that” I’m here to say “you can do it.”
Nobody was less qualified to start a company than I was back in 2004 – I was young and arrogant, impulsive and impatient, inflexible and prone to constant worrying. Fortunately, I tripped upon quality business mentors – perhaps the one thing I was cognitive enough to do was ask smart, successful people with wisdom well beyond my own to make a personal investment in me. And, they did. There was that, and my wife forced me to take ballroom dancing lessons where I met one of my top mentors!
You might also be saying to yourself, “But I’m a teacher” or “I’m a police officer” and “What do I know about starting a business?” The secret ingredient to every successful business is providing value. You need to solve a problem. How many times as a teacher have you sat in a staff room complaining about the lack of a particular learning resource for kids? Or, as a police officer, pondered a more efficient tool for forensic investigation. We all have ideas. We banter about them all the time amongst family, friends, and peers. But we don’t do anything about it.
How to start a company with minimal risk.
The first thing you need is an idea. You can validate your ideas by asking yourself two questions: is this a product or service for which people are willing to pay? Do I have the necessary knowledge to make my product or service the best in the market?
Every person has unique experiences whether you’re a teacher, a police officer, a fast food worker, or a construction worker. You know your industry. You’ve seen inefficiencies and experienced frustrations. Channel those frustrations towards a better solution and you’ll be well on your way to developing your first product or service.
The next thing you’ll want to consider is whether or not you’ll need partners to realistically design, develop, market, or sell your product or service. One of the best decisions I ever made when co-founding Imagine Everything was asking one of the smartest developers I’d ever met to join me in a little adventure. Student Aware, an online safety system for students, was the first technology we built but it required application load well beyond anything I’d ever designed before. Bringing on a partner made sense as it reduced the risk of being unsuccessful due to challenges trying to scale the application. Plus, he brought 25 years of his own life experiences to the table – and he tends to worry less than I do.
Just be careful with partnerships: you should try to form them in groups of three or five people to ensure you can make decisions. A 50/50 partnership or a partnership where one shareholder has less value than another is just asking for trouble.
As a teacher, you might want to partner up with an experienced mobile application developer. As a police officer, you might want to partner up with a heavy machinist or electrical engineer who can design an early prototype for a piece of equipment you want to develop. You don’t need to do everything yourself – you just have to be the driver!
Develop a business plan.
Writing a business plan is beyond the scope of this article and there are countless resources online to help you reduce the risk around your idea. I will suggest that as part of your business plan you should already have named, paying customers who are willing to commit to the idea. This gives you an early source of revenue, validation that you are offering a quality product or service along with valuable feedback to improve future iterations of your idea, and testimonials to help earn your next batch of customers.
It’s also worth noting that not all ideas are created equal. Choosing to open a sports equipment store requires an immense amount of upfront capital to fill your store with goods. Comparatively, developing a mobile application can be done at almost no cost if you or a business partner have the experience necessary to do the development yourself – there are plenty of free, open source tools available for such things! Take your ideas and sort them based on what’s realistic to deliver.
Build a prototype. Fast.
With a prototype, you’re aiming for the minimum viable product that is capable of delivering value to a customer. A prototype is four wheels, a battery, and a steering wheel as an electric car concept. The air conditioning, leather seats, and large-screen display come later. Figure out what the absolute essentials are to build confidence with your first set of innovative thinking customers and potentially to show to investors if you’ll need capital.
The most important thing you can do at this stage is validate what you’ve built before you get too far along.
Decide if you need capital.
Early stage capital usually comes from family and friends, banks, or angel investors. Be careful with family and friends – your relationships in life are far more valuable than the acquisition of wealth. Don’t ask anyone to invest more than they can easily stand to lose and be clear and forthright about the risks.
A bank will want you to put up collateral in exchange for your capital which creates significant personal risk but allows you to carry the burden yourself and maintain all of your shares. It’s a heavier lift now, but a terrific reward later if you can make the financials work.
The last option is working with an angel investor. They will be looking for you to offer them a deal: ownership of shares in exchange for capital. Expect to give up between 10% and 20% of your company. An angel investor acquaintance of mine suggested they accept about 1 in 33 people for a pitch and only about 1 in 10 of those are offered any opportunity for funding. Most cities have business accelerator programs that can help you get started and engaged with investors (e.g. Accelerate Okanagan in Kelowna is one of the stronger organizations I’ve seen and often organizes things like “open pitch nights” and pitch and slide deck preparation seminars).
If you’re curious about the term “venture capital”, this is usually reserved for later stage companies who are already fairly well established: they generally have a prototype, customers, revenue, and an experienced team. Their intention is to take what’s already been successful and multiply it by investing significant capital. You may hear about companies seeking “Series A” or “Series B” funding – this really tells you about their stage of corporate development and the amount of capital they’re seeking to accelerate their growth.
You can also research the BERKUS business valuation model if you want to see through the eyes of investors. It will help guide you in figuring out what your valuation is and how much of your company you may have to trade in exchange for capital.
Surround yourself with an army of experienced professionals.
Get to know a financial advisor, lawyer, and accountant at an almost intimate level. Find people who are willing to make a personal investment in your success. A great way to meet people is to take them to lunch – it’s been my long and tried experience that 100% of people need to eat and 99% of them get enjoyment out of doing it.
Your financial advisor should have immense experience with corporate tax planning as well as a track record of helping to build up successful entrepreneurs – we’re not talking about your door to door financial advisors here! Their success is based on your success and it’s the best dollar to value ratio you’ll ever get out of a professional service person. They should be familiar with LCGE, flow through shares, trust fund strategies, as well as corporate insurances that can have personal tax perks. This person will be your personal cheerleader and a major source of encouragement but tagging along with a PhD-level of experience in business economics and personal wealth building.
Your accountant should be experienced with corporate tax planning as well as setting up trust funds. These people should not be confused with bookkeepers: some of them may offer this valuable service as well but their depth of corporate strategic financial planning will be much deeper. Want to know if you have a qualified accountant for your entrepreneurial needs? Ask how many business valuations they’ve done that have resulted in a successful acquisition or merger. Ask for references.
Find a mentor who’s done it before.
One of the most important decisions you can make is to find a mentor or coach who is currently where you want to be a few years from now. You can avoid costly or crushing mistakes by garnering the history and experiences of a mentor. In a way, they’re like oracles who can tell you about the future. Your future. And, although their power to inform good decision making isn't exactly magical I can’t overstate their momentous contributions.
Don’t quit your day job.
Until your new company has sustainable revenue, try to hang on to your job. There are many reasons why companies fail: partnerships imploding, a poorly validated idea, rapid and unexpected changes in the market, a pandemic. Try to minimize the financial risk you need to make by maintaining your main source of income as long as possible before transitioning into full-time work for your new company.
The first company I started was a software company called Dreamstalk – like a “stalk” of corn. Get it? Yeah, nobody else did either. It was a total flop. But incidentally through coaching a basketball team I was connected with a rather amazing principal who took the concept we’d been trying to apply to agriculture in education and it was a hit. It resulted in meeting and working with some of the most amazing people and a company that grew incredibly quickly!
Another great way to get started is by side contracting. There are many marketplaces to sell services such as Fiverr that manage all of the transactions and communication for you. This can be a good place to test doing work for yourself, but you should still consider incorporating for the tax benefits and depersonalized brand.
“It’s not personal, it’s just business.”
Remember, if your ultimate goal is to sell some or all the shares of your company, you’ll want to build a brand that doesn’t revolve around you. At some point, you want to be able to step back from the company and it’s easier and less costly for a potential buyer to do so if you don’t call your company “John Smith’s Photography.”
When you incorporate, carefully consider your share structure. In order to leverage your LCGE you must sell the shares in a company. This means if you want a spouse or other family and friends to be able to benefit by leveraging their LCGE they must also be shareholders. Transferring shares at a later date after the company has value has significant tax implications so it’s easier to get this part right initially.
It’s always a good idea to incorporate using a lawyer you know and trust. This will often cost between $1,000 - $3,000 depending on who you use. If you do need a more budget friendly option, you can look to services like Arvic Corporate Registries who have named and unnamed companies ready to go. This can often result in costs closer to $600-800 but don’t neglect working with an actual lawyer too long.
A trust fund allows you to leverage the LCGE of many people, usually family and close friends, without relinquishing control over the operation of the company. In the event you were to build a massively successful company that was valued at $100M you would need over 100 people in a trust fund to disperse the capital through LCGE without being taxed. That’s probably more people than is realistic, but it demonstrates how a trust fund can be utilized to maintain control while still ensuring you’re maximizing the LCGE to minimize tax and distribute the wealth to people you care about.
Money is not the root of all evil, but the love of money corrupts. Money can buy food for the impoverished, it can build homes for the homeless, it can rescue orphans from dire situations. It can build parks and brighter communities. As you build wealth remember to be kind and generous to your family, friends, community, and those in need – naming charities in a trust is an exceptional way to ensure your estate maintains altruistically motivated.
Announcement: Imagine Everything helps our team leverage their LCGE while providing direct kickbacks to public education.
We’re incredibly fortunate to work with an amazing team at Imagine Everything. These are driven people who work hard for our school boards and they deserve a shot at building wealth. The best way we know to do that is through LCGE. That’s why Imagine Everything will be introducing an incubation program where every member of our team will be involved with a startup.
Starting in October 2022, we’ll be allocating a portion of our time to work on incubation projects outside the education space where the people who join the Imagine Everything team will be major shareholders in those side ventures. Imagine Everything will help by developing business plans, capitalizing projects, leveraging our diverse team experience for sales, marketing, software development, and support, as well as utilizing our assets such as tools, code, and design capabilities to accelerate those ventures.
The school board community will benefit in that Imagine Everything will remain a partial owner of each venture with a significant portion of the financial kickbacks going directly back into public education. It’s always been our mission to reduce the cost of software ownership in the public education space and this seems like a great way to do just that.
Our two-fold goal is to ensure every single person who joins the Imagine Everything team is able to be personally financially successful while continuing to drive down the cost of technology for public education.
There’s one difference between you and big shot CEO’s.
They said “yes” when you said “no.” They said “I can do it” when you said “I don’t have the time” or “I’m not enough.” We have an expression we like to use around Imagine Everything: being smart isn’t a talent, some people just work harder. Learn, grow, take calculated risks!
I want to conclude by encouraging you to say “yes.” The world needs more innovators challenging the status quo. It needs underdogs challenging the big conglomerate companies. Keep saying “yes” even when things get hard. Even when you feel like you’re failing. And, you will eventually succeed.
Drop us a comment below if you intend to be the next successful entrepreneur! We’d love to watch your success.