Ask The Experts: Starting a Business in Retirement

Ask The Experts Starting A Bussines In Retirement

It’s becoming increasingly common for people to start their own businesses when they reach retirement age, either because they are financially unable to put work aside completely or because they want to explore long-neglected hobbies now that they have some free time.

While it is easy to idealize such a scenario, assuming now to be the perfect time to start a company because you have built up a great deal of expertise and still have the energy to put in a full day working for yourself, the experts we consulted all advise a high degree of caution. Starting a business takes money and keeping it going takes time – lots of time.

“The first consideration should always be ‘why am I doing this,’” said Peter Russo, a former CEO and the executive-in-residence at Boston University. “Are your goals philanthropic, or are you trying to build wealth or finance your lifestyle? Some retirees launch ventures just to keep busy. The rest of the choices you make should flow from the answer to this question.”

Be Realistic About Start-Up Costs

Christopher Stevens, director of the Hogan Entrepreneurial Leadership Program at Gonzaga University, says he would counsel someone considering a start-up to look realistically at the costs.

“There hasn’t been a single business that I’ve had interactions with that hasn’t cost more than the owner anticipated it would,” Stevens said. “Financial management, specifically the management of cash flow, is absolutely key to the venture. The ventures that we see fail, and fail early, are primarily those that are unable to raise and hold onto cash. For Baby Boomers, there is the specific need to segregate the money they are willing to put into the business and that which they need to live on.”

Clifford Atherton, Managing Director of the Gulfstar Group, an investment banking services company, flatly says retirees should pass on starting a new business.

“Instead, consider buying an existing business that has customers and cash flow and an owner who will provide short-term advice post-closing as well as a seller note to help finance the deal,” he said. “There are lots of small business owners with limited exit opportunities.”

But he warns, if you are to be successful running a business, you have to be willing and able to lose every dollar you put into the business and still have a comfortable retirement. Who can do that?

Don’t Quit Your Day Job

A lot of retirees start planning while they are still employed. The reason is simple. One of the largest sources of business is your soon-to-be-former employer and your customers.

“See if you can get a consulting contract with your boss for after you retire,” said Jerome Katz, The Coleman Professor in Entrepreneurship at St. Louis University.

“This can be to dive into the boss’ or firm’s to-do list,” he said. “You know the political and organizational constraints, so you can land running, relative to outside consultants.”

Businesses to Avoid

The type of venture that you start in retirement obviously depends on your interests, knowledge base, and financial constraints, but David A. Tomczyk, an assistant professor of entrepreneurship at Quinnipiac University, says there are two types that should be avoided altogether.

“Businesses that are trendy, but you don’t understand,” he said. “And businesses that take every cent you have just to launch it.”

Franchises could offer an opportunity for a new entrepreneur, under the right circumstances, but again they should be approached with caution.

“You don’t control your destiny and you will pay a premium for someone else’s brand,” Atherton said.

He suggests interviewing others doing business with the same franchisor – both successful and unsuccessful. He also points out the franchisor will have expectations from you – which is almost like having a boss – the very thing you may be starting a business to escape!

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David A. Tomczyk

Assist. Prof. of Entrepreneurship, Quinnipiac University

What considerations should go into starting a business in retirement?

First and foremost, make sure the idea is something you are passionate about. If the business idea doesn’t excite you, seriously consider why you want to start it as a business. Second, use your time to research your market, read up on the latest trends, and sketch out your business idea. Use your network to get feedback on the idea. You have one resource most other entrepreneurs don’t have – time. Use it well.

I also strongly encourage you to talk to a financial planner about how starting a business will impact your personal finances. If you are planning on dipping into your savings or retirement funds, you should know how that will impact your life.

Are there some types of businesses that someone in retirement should avoid?

There are two types of businesses to avoid:

1) Businesses that are trendy, but you don’t understand; and

2) Businesses that take every cent you have just to launch it.

Don’t listen to friends or “experts” who say you should go into an industry because it’s “hot” or because of a few examples of successful entrepreneurs. If you don’t understand how the industry works, what the demand is, who you are selling to, and why people would buy from you rather than someone else, then it’s not the industry for you.

If you want to start a business, but it’s going to require you to take all the money you’ve saved over the years, seriously rethink your idea. Maybe you can start smaller, or find ways to cut costs, or maybe you need to change your business idea altogether. Starting a business should not bankrupt you.

What are the pros and cons of buying a franchise in retirement?

Not all franchises are equal. Some provide constant guidance and mentoring, help you plan out your location, and provide on-going support throughout the life of your business. Others basically allow you to use their name and hand you a bunch of guidelines to follow. Both types will require you to pay a fee for belonging to the franchise. Make sure you are comfortable with what you will get for what you pay.

Also, depending on the franchise, be aware that you may not make much money off of running only one location. Some franchises require people to own multiple locations to make a livable profit.
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Jerome Katz

Coleman Professor in Entrepreneurship, St. Louis University

What considerations should go into starting a business in retirement?

Think in terms of the time commitment, as well as how much of your retirement funds do you want to risk, if any. A lot of retirees start planning while they are still employed. Why? Because one of the largest sources of businesses is your soon-to-be-former employer and your customers. See if you can get a consulting contract with your boss for after you retire. This can be to dive into the boss’ or firm’s “to-do” list. You know the political and organizational constraints, so you can land running relative to outside consultants. Many people get hired to offer advice for a period after retiring. And if your boss approves, you can ask customers about working for them, perhaps to help them improve their use of businesses like the one that employed you, or to take on projects your current firm wishes the customer would do, but can’t profitably take on.

The other major opportunity is using the second career to retread yourself into something you have passion for, but couldn’t fit into your prior job. This can be totally different, or leveraging your knowledge and experience in a new type of setting, such as non-profits, etc., or leveraging your hobbies.

Are there some types of businesses that someone in retirement should avoid?

From an industry perspective, I don’t see many that I would say are a no-no for retirees. But as I would say for people in general, choose a business that minimizes your risk – financial, time, and work style. Taking it a little easier and taking on a consulting business that puts you on the road all the time (first selling then delivering) is not going to make you happy.

What are the pros and cons of buying a franchise in retirement?

Franchises can be great if you’re thinking about retreading, since the franchise will train and equip you for their business. That said, franchisors look for a major commitment, so if you think of slowing down the pace, or having more time for family and things you enjoy, be careful to find a franchise that really can be happy with you working a 9-5 schedule. The other issue on franchises is they want money up front, and in retirement, this money is coming out from the funds you’re probably dedicating to retirement. This is when you need to fire up the spreadsheet or talk with an accountant to figure out if the returns from the franchise is worth risking the money to buy-in. There are no gold mines in franchising, but there are franchises that can deliver good returns, but you’ve less time to make up losses when in retirement, so the risk is actually higher for retirees than for young people.
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Clifford Atherton

Managing Director, The Gulfstar Group

What considerations should go into starting a business in retirement?

First, with respect to starting a business, don’t do it. Instead consider buying an existing business that has customers and cash flow and an owner who will provide short-term advice post-closing as well as a seller note to help finance the deal. There are lots of small business owners with limited exit opportunities.

Risk and commitment: If you are to be successful running a business, you have to be willing and able to lose every dollar you put in and still have a comfortable retirement. Don’t expect to be a passive owner even if you buy a business with a solid operations manager. Certainly you now have more capital, life experience and managerial experience in retirement than you did then, but retirement is not the best time to take a risk you should have taken 2 or 3 decades earlier if you really wanted to be your own boss. If you choose to go into business for yourself, you have to be absolutely “all-in” which means you should have a very honest conversation with your spouse.

Also think very hard about how many and what type of employees you want to recruit, train and manage. Employee issues will move to the top of your list of alligator issues.

Are there some types of businesses that someone in retirement should avoid?

Anything that is capital intensive. Services are a better bet. They scale readily and require less capital for growth. If demand outgrows the time you have available you can adjust prices.

What are the pros and cons of buying a franchise in retirement?

You don’t control your destiny, and you will pay a premium for someone else’s brand. Carefully interview others doing business with the same franchisor – successful and unsuccessful franchisees – to determine what separates them. Franchising is a two-way street. The franchisor will have expectations of you, so it will never be exactly the same as owning your own business. Franchisors choose that business model to recruit franchisees who can grow their distribution rapidly in a particular territory. Your goals need to align with those of the franchisor.
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Peter R. Russo

Executive-In-Residence, Director, Entrepreneurship Programs, Boston University

What considerations should go into starting a business in retirement?

The first consideration should always be “why am I doing this?” Are your goals philanthropic, or are you trying to build wealth or finance your lifestyle? Some retirees launch ventures “just to keep busy”. The rest of the choices you make should flow from the answer to this question. You should also define what resources you are willing to bring to the venture. How much time do you have to give? How much capital can you put at risk? What skill set have you built up during your lifetime and how can you make that an asset to your new venture?

Are there some types of businesses that someone in retirement should avoid?

There is no specific description that fits all people in retirement, so that is a hard question to answer. In general, the business you choose to launch should be one that fits your own goals. If you plan to run the business, it should be something that you know something about. Given the fact that most businesses require a lot of time and attention (especially early on), it should be something that you enjoy doing. You should carefully consider the lifestyle that you want and make sure that it is consistent with someone succeeding in your chosen business. For example, if you want free time to travel, do not choose a business that requires your constant presence to operate. It is always a good idea to look for opportunities in markets or with products that you know something about. How can you leverage the skill set that you developed during your career and turn it into a viable business opportunity? If you choose instead to enter a totally new field, be prepared for a steep learning curve.

What are the pros and cons of buying a franchise in retirement?

For anyone, a franchise can represent an opportunity to be an entrepreneur for someone with limited business experience or who is entering a new field. You can obtain the brand, structure, the business model and the counsel of someone who has already had success and can help you reduce the risk of your venture significantly. That said, this infrastructure does not come for free. Recognize that you will be sharing your success with the franchisor and perhaps more importantly, you will sacrifice flexibility. You will not be able to make all of the choices that an entrepreneur would make running his/her own business, since many of those choices are defined as part of the franchise agreement.
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Ting Zhang

Prof., School of International and Public Affairs, University of Baltimore

What considerations should go into starting a business in retirement?

Key factors that can be considered based on my research affecting seniors’ entrepreneurial propensity include health, family obligations and family support, wealth and income (liquidity constraints), previous working experience, network, and skills, health insurance – particularly comparing being self-employed to being employed by someone else – tax rate, and local socioeconomic environment. By the way, many older adults are engaged in unnecessarily paid social activities and they want to bring back to society or fulfill a certain value, or sometimes realize a wish that they could not have done (enough) before. This means being self-employed could not only result in financial benefits, but also better health and greater happiness. Our recent research is focusing on that as well.

Are there some types of businesses that someone in retirement should avoid?

Not necessarily any specific type or industry to be avoided in general, as long as one can find their own niche. It depends on individuals’ circumstances. However, in general, I would recommend starting with businesses that are related to one’s previous working experience, network, and skills and taking the business owner’s responsibility in a relatively less physically demanding manner.

What are the pros and cons of buying a franchise in retirement?

It depends on individual goal of starting a business in retirement, to obtain additional income in retirement, to fulfill certain social and career ambition that was not necessarily fully achieved at younger ages, or else. Buying a franchise is following a preexisting structured business model with known costs and fees and royalty obligations; starting a non-franchised business could offer more entrepreneurial freedom but less guidance to follow.

In general, the pros of buying a franchise include (1) an already structured preexisting business plan: with known costs, guidance on location, purchasing, and on the quantity and types of goods used, established relationships with reliable suppliers, established brand with a built-in customer base, and addressed legal issues; (2) benefiting from group marketing; (3) getting certain training and problem-solving assistance sometimes.

However, the cons also come with the pros. (1) Restrictions that could stifle one’s entrepreneurial and creative spirits. Typically, franchisees are lack of control over the goods to use and the cost of these goods, have restrictions on what other kinds of businesses that can be involved in or operate, and sometimes have limitations on employment in related fields. (2) Costs: In addition to the initial franchise fee, a franchisee is often required to pay the franchisor a percentage of profits as a royalty, a potentially above-market cost for equipment, goods, and supplies purchased from the franchisor, sometimes training fees for the franchisee and her/his employees, and contributions to group advertising that could have little value to the local franchise. (3) Negative impact on one’s business if another franchisee ruined the reputation of the national/international brand.
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Christopher E. Stevens

Director, Hogan Entrepreneurial Leadership Program, Gonzaga University

What considerations should go into starting a business in retirement?

The first thing that I would consider if I were counseling someone who was trying to pursue that is to really research the start up costs. There hasn’t been a single business that I’ve had interactions with that hasn’t cost more than the owner anticipated it would. Financial management, specifically the management of cash flow, is absolutely key to the venture. The ventures that we see fail, and fail early, are primarily those that are unable to raise and hold onto cash. For Baby Boomers, there is the specific need to segregate the money they are willing to put into the business and that which they need to live on.

Are there some types of businesses that someone in retirement should avoid?

There are some business, like food service and heavy retail, that suck a lot of time out of the day, not just in management but in staffing. So Boomers starting a new business in retirement have to decide first how much they want to work. It’s a lot easier for a 30 year old to jump into a new business model and say, “I’m going to do whatever it takes to make it work.” That’s a lot harder for someone who has become used to a certain way of doing things.

What are the pros and cons of buying a franchise in retirement?

Franchises can be good opportunities, as long as the terms are well defined and compatible with the owner’s lifestyle.

 
Image: StockLite/Shutterstock

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