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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