You have an appointment with a new, prospective client couple.They've retired from full careers with corporate America and are funneling their energies into opening that used bookstore they, as avid readers, have always wanted to own. You are less enthusiastic about this plan than they are. On the one hand, a small business might be just the thing retired boomers need to keep them off the streets and out of the malls where their proclivity toward overspending is fully realized. But if that small business turns into a money drain, the net effect will be the same. Moreover, trends in bookselling do not favor small independent retail outlets.

In any case, you realize that advising on small business formation and operation is yet one more skill the boomer population is forcing you to retrain for (in addition to Budgeting 301 and Advanced Hand-Holding). So where do you begin with this couple?

First Cut: Is The Client Willing And Able?

Kevin Reardon of Shakespeare Wealth Management Inc. in Brookfield, Wis., says the first step is to size up the clients and their capabilities. "I need to understand the clients relative to the business opportunity they are pursuing." The first question, naturally, is whether the clients have previously owned and successfully run a business, says Reardon. "If they haven't come close to running a business and aren't the kinds of persons who would wash their own cars or cut their own grass, then they're probably approaching their business opportunity with rose-colored glasses."

Reardon then challenges every assumption the clients are making and pokes holes in their plans. "I ask for a copy of their business plan, which most of the time they don't have. I ask for their budget, which typically reveals shortfalls and omissions, if they have one at all."

In other words, Reardon tests for signs of business savvy and clear thinking on the part of his would-be entrepreneurs. "If a client is considering a business in which they have little experience, we challenge them to work in that industry first, prior to investing any of their own money. Many people fall in love with the concept of owning a bed-and-breakfast without ever having worked in one. Speaking with someone who has already 'lived the dream' usually turns people off once they realize how difficult it can be." Before you let your client buy that 50-foot charter fishing boat, says Reardon, have him serve as a crew member for six months on someone else's boat.

Ted Feight of Creative Financial Design in Lansing, Mich., applies a different filter to this screening process. "I remind my clients that retirement is a three-stage process. ... The first is the 'go-go phase' where they go go go and do do do. The second is the 'slow-go phase,' where pain and sickness prevent them from keeping up that pace. And the third is the 'no-go phase,' where they're hurt, sick and may not be able to take care of themselves. I say, 'You may be able to run a business through one and a half of these phases, but you won't be able to during the rest. Assuming yours is not among the 80% of new businesses that fail, how are you going to replace the income from the business when you can't run it anymore?'"

As an example, health and lifestyle considerations interfered with the plans of Bradley Bofford's clients when they relocated to Florida to operate a vending business. Bofford, managing partner of Financial Principles LLC in Fairfield, N.J., says, "The couple was living in northern New Jersey, got caught up in the Florida real estate boom and sold their Jersey house in 2004 to buy a home above their means in Florida. They figured that to supplement their income they would buy a local vending business."

Having done little of the planning suggested by Reardon, and without knowing Feight's three retirement phases, Bofford's clients learned the hard way that the business they'd chosen was highly labor-intensive and clearly not appropriate for them at their age. "The business is failing, it's draining their portfolio and IRAs, and now they're having to sell their Florida house for less than they paid for it."
Says Holly Thomas, a former commercial banker who is now with Tampa-based Independent Insights of Florida LLC, "When I was in banking, I had a client in the early 1990s who sold his business for about $1 million. Instead of putting any of it in the [stock] market, he invested it in five small, closely held businesses. Since this was before my financial planning days, I thought that was a wonderful thing. Throughout the '90s, he kept coming back to me for loans when he needed money, which I happily obliged to provide him."
On the surface, this looks like a great plan. After all, the client had already been a successful business owner, and by investing in five small businesses, he was achieving protection through diversification. Yet, says Thomas, "Only after I became a planner and calculated with him what he would have made in the market from 1991 through 2004-compared to the value he'd created in his five businesses-did it hit me that he would have been better off in the market."

Ah, you say, but the businesses gave him something to do during that initial go-go phase and they did make money. True, explains Thomas, but the businesses took all his time during this period while the client was still healthy and active. If he'd invested elsewhere, "he would have been better off not only financially, but the businesses wouldn't have robbed him of other experiences he might have had while he was still able to enjoy them, like vacations and time with his family."

Another thing boomers should think twice about is their proclivity to base their businesses on their hobbies, says Reardon. "This isn't a bad thing, but once [I have them] put some research into their business idea, they begin to value their day job." Sometimes Reardon finds he can help his clients make adjustments to their current job situations-adjustments that increase their fulfillment and overall job satisfaction. "If you address and reduce the pain coming from their current jobs, the idea of pursuing a business in retirement tends to fall by the wayside."

Sean Monohan with Partner-Certified Financial Strategies in Dallas has a different take on hobby businesses. If his client's business idea sounds like a "hobby business," he says, he advises her to include the venture's expenses among her personal monthly expenses, to be managed within the limits of her normal retirement income. "If the client thinks his hobby business is a real business, he or she generally rationalizes spending more and more on that business," says Monohan. And if the client hasn't set up the proper books to analyze and track his business efforts, which is not uncommon, he says, the client will often lose the deduction for most of his business expenses under the IRS' hobby loss rules.

Second Cut: Is The Client Financially Prepared?

So the small boomer business must match the boomer's abilities during retirement, but it must also make dollars and cents sense as well. Which brings us to the next screening variable: finances.

Says Reardon, "I next want to identify the potential monetary outlay that is needed by the clients to start their business and, thus, the potential harm to their financial plan if they fail." Maybe the client wants to start a consulting business, he says, in which the monetary outlay is nominal. "Then I have less concern about them failing and doing harm to their financial plan. If, however, they need to invest a sizable dollar amount to begin, then I take a much more involved role."

Says Thomas, "I think it's easy for planners to get trapped into opining on the value of the client's business plan rather than sticking to the general idea that having a closely held business as a predominant asset class in the boomer's portfolio is dangerous. Even if a planner is qualified to provide advice on starting or running a business, they should clearly delineate when they are wearing the business banker hat and when they are wearing the financial planner hat."

In other words, small business aspirations are to be taken seriously. You wouldn't let your clients sink half of their portfolio into an alternative investment run by an inexperienced general partner or take a highly concentrated position in a public stock, but that's what many boomers will be doing, in effect, when they start their own small businesses.

Feight worked with a couple who he says retired with what they thought was a lot of money but, then again, they were used to having and spending money. When the wife wanted to remodel the house after retirement, she thought nothing of using investments that were helping to meet their income needs. When they couldn't live on the income being generated by the remaining investments, she decided to start a business-taking even more money from their holdings for start-up capital. Says Feight, "Her business isn't making any money at all," yet the client can't bring herself to get a job, which she needs to do to replace the income lost when she liquidated investments to remodel her home and start her unprofitable business.

Dave Hinnenkamp, CEO of KDV Wealth Management with offices in St. Cloud and Minneapolis, Minn., says, "If a boomer client with little or no business management experience is now retired and wants to run a business, I generally discourage it-particularly if the client worked for a paycheck most of his life. Keeping in mind the amount of capital the business will need and the fact that most small businesses fail in the first few years, it's not a good idea to risk capital that will be needed in retirement." If a client fits this description and needs more income in retirement, Hinnenkamp encourages them to stay in their job a few more years. "It's much less risky."

As these advisors point out, a job is the obvious alternative to starting a small business. We've got a client who was presumably glad to retire from his last job (perhaps it was a job he worked in many years and grew tired of) but knows he might require some earned income during retirement. His first inclination is to start a business because (pick one or more from the following menu): He wants to finally experience being his own boss; he's got a nifty business idea he's always wanted to test in the free market; he's always heard that owning one's own company is the best path to financial freedom; he needs to keep busy but can't stomach the idea of staying in his old job any longer; etc.

In other words, his reasons for wanting his own business in retirement are less than sound, but he still needs income and something to do with himself. A job is the obvious answer. Says Malay S. Vasavda, a principal with Quantum Financial Management LLC in Chicago, "Generally speaking, if the client has overspent and undersaved up to the point of retirement, chances are the start-up costs for the business he is contemplating will significantly increase his risk of not having enough resources to get through retirement. In this case, the focus is going to have to be on significantly reducing the client's lifestyle and working for [someone else] to supplement retirement income."

Adds Scott Noyes of Noyes Capital Management LLC in New Vernon, N.J., "I generally advise my clients never to retire. As one of my clients who is 72 years old told me, 'There's nothing cooler than handing out your business card at a cocktail party and watching people's reactions." In other words, there can be pride in remaining gainfully employed-whether you or someone else is the employer.

Third Cut: After The Preliminaries

If the client has a plan, has the skills and/or experience and understands the effect a small business will have on his or her lifestyle, then the advisor can proceed to help her client with the nitty-gritty planning decisions all new businesses require.

One advisor who is in a particularly good position to do this is Janice Swenor. Of boomers starting businesses, Swenor says, "That is what I am doing in my own personal life!" Working in a demanding job in the technology field, and knowing her husband would soon retire, she decided to look for a job in which she would have the flexibility to enjoy time with her husband and work from multiple locations without fully retiring. What she ended up doing was starting Langtree Associates-an independent financial advisory firm in Westminster, Mass.-in 2004.

"Because my husband and I had done our own financial planning, I have been able to make this ongoing transition without impacting his retirement plans," says Swenor. "If we had not had this plan in place, I don't know whether I would have had the time to re-educate myself or would have had the upfront capital available to start my business. Another key item was the construction of a business plan; since I was launching the business so close to him retiring, I wanted to ensure that I knew exactly where I needed to be when in regards to business development, and that if I didn't hit those objectives, I had a plan in place for modifying my business development strategy or exiting the business."

Not through experience, but through planning to avoid the experience, Swenor understands that for a boomer who has overspent and undersaved his whole life and is now retired, the impact of a failing business can be significant. "As a financial planner, I would strongly suggest to a client of mine that his business plan include an exit plan to ensure that, if the business is not successful, he knows when to throw in the towel. If done with the right amount of planning and thought, the new business could help the boomer significantly; if done without much thought and planning, it could be a disaster!"

Better yet, says Robert Bartley, president of Bartley Financial Advisors in Andover, Mass., and Bedford, N.H., "I encourage clients to start the process long before retirement. Because planning and, even more importantly, networking are such a crucial part of business success, starting early allows them to feel more comfortable with taking the leap from their full-time job because some revenue replacement is already in place."

Adds Tina Anders of Anders Financial Planning in Petaluma, Calif., "AARP says 80% of boomers will want to work in retirement, they have the time to properly develop a business plan and they've probably paid off their mortgages. They also say banks are looking more favorably upon funding retirees' small business proposals since many boomers have relevant experience with networks in place."

But does the fact that boomers are being encouraged by AARP make starting a business the right thing to do? Monohan says, "If the client truly understands the likely time commitments and has either extensive industry experience or at least a plan to develop it, there is more of an opportunity for success. However, if the client glosses over the [planning required by a new business] and has a 'fantasy' view of how the business will perform, I counsel him to understand the risk he's imposing on his financial situation."
My own sense is that most advisors are significantly less sanguine about boomers' business management prowess than is the AARP. And in the name of protecting our clients' futures, that's probably for the best.  

An independent financial advisor since 1981, David J. Drucker, MBA, CFP®, has been an industry influential for many years. Learn about his books, public appearances, Practice Lifecycle, Virtual Office News and the annual "Technology Tools for Today" Conference at