What do you tell a client who wants to start a business with his retirement nest egg?

    If you've ever counseled a retiring client on starting a business, you've participated in a relatively new phenomenon that will become increasingly commonplace. Much has been said about how planning for retiring boomers will be very different from planning for their parents, and one example will be their desire to start businesses in retirement.
    Unlike the golden watch generation,  boomers are more likely to see life as a never-ending, risk-taking adventure. They're eager to recapture their youth, including the experiences they wanted and never had. For example, witness the thriving business in muscle cars, sports cars and motorcycles among the 50-plus generation.
    For similar reasons, many boomers who spent a lifetime working for others will want to take the plunge into self-employment in their sixties and seventies. No longer will advisors just churn out Monte Carlo projections to stress-test portfolio longevity; they'll need to somehow address this different dimension of retirement planning.
    As with all advisory niches, they have choices about how to acquire business-counseling skills. Advisors can learn these new skills for themselves, hire staff that possess these skills or outsource this need. Of course, many advisors possess at least rudimentary business counseling skills by virtue of having built practices from scratch. We know what it's like to develop a plan of action to ensure sufficient working capital and, hopefully, profits.
    Says "Buz" Livingston of Santa Rosa, Fla., who recently entered planning,  "During 2005, I beta-tested my business plan as a Garrett Planning Network advisor. Although I had worked for myself in other small businesses, with varying degrees of success, I had never appreciated how important a business plan is. So, for any client, retired or otherwise, who anticipates starting a small business, I strongly urge them to go through the business planning process; it's essential."
    The question for advisors is, will they be the ones to take them through that process? Gail Parker, a CFP in Portland, Ore., outsources the job. "Oregon community colleges have courses for running a small business. This is a beginning step that I recommend to anyone without prior experience. The course is several months long and requires perseverance; it also provides mentors and business entrepreneurs to critique the client's business plan. The client gets the picture as to the hard work, expense and commitment a business requires, but it doesn't discourage those with solid plans."
    Another way of sidestepping the need to do the business planning yourself is to do what Rebecca Preston does. Preston, of Preston Financial Planning in Providence, R.I., says, "I told two clients who wanted to have their own businesses after retirement to get a job for a year in the field they were contemplating-the food business." Preston reports that neither client lasted a year, and that was the end of that.
    Similarly, Rebecca Pace of Pace Advisors LLC in Cincinnati refers clients to a SCORE counselor. SCORE (www.score.org), a Small Business Administration resource partner, is a nonprofit organization formed in 1964 to offer citizens small business advice and training. Through its "Counselors to America's Small Business" program, clients can receive one-on-one advice. "I've had good experience using SCORE and the SBA with business start-ups," says Pace. "If a client's idea really doesn't make sense, the SCORE counselor can be a great help."
    Advisors who take on the full brunt of the business planning process themselves cite the importance of having the client initially separate the emotional or psychological from the hard numbers part of the process. Before analyzing the client's business opportunity, Bill Cleveland of Preston & Cleveland Wealth Management in Augusta, Ga., first discusses with the client her thoughts, motivations and goals, which tells him whether the client is contemplating a hobby or a real business.
    "If it's a real business, then they need to treat it like one and have a well-thought-out business plan. I've seen several individuals continue to sink money into hobby-like, unsuccessful ventures. Of course, we must determine the maximum amount that could be spent by the client without impacting her financial independence. But the emotional side is more difficult. Many retirees are just looking for something fun to do with their time."
    Adds Stephen Jones of Stephen T. Jones Financial Services in San Antonio, "In some businesses, clients must be prepared to have less contact with people and periods of loneliness. They must have the personality to stand up to the rigors of calling all the shots, and possibly having to do all the dirty jobs." The downfall for many clients (and advisors too) is a lack of marketing skills, says Jones. "The client will find herself having to think about and market the business constantly during the first few months."
    Mary Lacey Gibson, CFP, a small business coach in San Juan Bautista, Calif., has her business-inclined clients read The E-Myth Revisited by Michael Gerber. "This powerful little book gives them an overview of what they're getting into. Most people focus on the operational or 'fun' part of business, and don't realize that there will be the daily accounting, bookkeeping, marketing, janitorial, management, personnel, planning-everything that goes into a business."
    Gibson next has her clients do a personal assessment to determine, among other things, their skills and tolerance for mood swings and failure. "It's during this process that the nature of the business and the personality of the prospective owner either mesh or not. It's at this time we talk about their idea and whether it will meet their needs in all areas-not just financially. I usually don't have to ever come right out and say that they have a bad, crazy or unworkable idea. The process lets them find out for themselves."
    The importance of substantiating a client's business acumen and personality before delving into the analytics can't be overemphasized. Eve Kaplan of Kaplan Financial Advisors LLC in Berkeley Heights, N.J., tells of an extreme example-a client she describes as lovable but very scatterbrained. "She was a trained therapist who began taking courses to learn how to 'flip' properties, and neglected her practice to the point of abandoning it. I coached her to give up the 'get rich quick' scheme and concentrate again on her practice. She was simply someone with little business sense who needed to be redirected."
    Of course, some clients will be legitimate candidates to start small businesses. They'll have the skills, the emotional fortitude and, if they can be running profitably within a reasonable period of time, the money. What, then, is the next step for the advisor? Gibson has counseled many retirees and near-retirees about starting a new business, and has a defined process through which she takes start-ups.
    "The very first thing I tell prospective new business owners is that the financing of the venture must come from outside their retirement money. There is no way to get this money back if a new business fails. Without another source of funds, we usually don't go any further. The sources could be a start-up loan, savings or private loans from family or friends. Just so that the retirement money is not at risk." Gibson makes an exception for a "bootstrapped" business that doesn't have to generate income for the owner but generates profits that can be plowed back into the business.
    Next, Gibson has her client do a formal business plan. "It's a very detailed working handbook for the business, even more complete than a plan used to get a loan." Gibson's plan allows the client to see on paper, fairly realistically, the first two years of the business, before spending any real money.    "Many people, after discovering the complexities of owning and running a business, decide not to start."
    But for those who do, Gibson's exit strategy is the final piece. "A retiree business usually lasts five to 15 years, and often ends due to a crisis rather than by design. Planning for as many contingencies as possible in the beginning saves a lot of stress at the end."
    Glenn Kautt of The Monitor Group in McLean, Va., takes an approach similar to Gibson's. He also discusses with his client what he calls "the five critical elements of any business," and how the client intends to handle them. "Sales and marketing, production/operations, distribution, accounting/taxes and personnel/human resources... if they don't have a good feel for these elements, we stop and explain what they must do in order to be successful. Basically, I'm trying to talk the client out of going into business unless they are willing to address all the critical elements. If they don't get all the parts right, eventually one of the wheels will fall off and the business will fail."
    If Kautt's client passes that test, only then does he take a close look at their product or service and how it might fare in the competitive marketplace. "I encourage the client to do significant market research before opening their doors, to assess pricing, market size, growth opportunities and the regulatory environment, so there are as few surprises as possible."
    Kautt's cynicism may be justified. Many advisors can point to clients with unrealistic expectations. Brian Jones, with Cooper, Jones & McLeland Ltd. in Fairfax, Va., periodically encounters retirees with real estate aspirations. When he runs retirement and income projections with these clients, Jones says they never expect to need much money from their portfolios. "One client planned on making $100,000 a year inside of 12 months, which isn't an impossible number-it's just a little bold if you've never done this before. I try to temper their enthusiasm a bit with everything they don't want to hear."
    Having gone down all these roads, most clients won't be candidates to run small businesses, though some will have a simpler alternative available to them. Says Bert Whitehead of Cambridge Connection Inc. in Franklin, Mich., "My most successful business-oriented retirees are clients who I encouraged to become consultants in the same field they worked in. They work half the time they used to and make twice the money-plus, they are in control of their lives."

David J. Drucker, M.B.A., CFP, an independent financial advisor since 1981, now writes, speaks and consults with other advisors as president of Drucker Knowledge Systems. Visit his practice management portal, Practice Lifecycle, at www.practicelifecycle.com.