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.