There’s one sure way to fail at starting a business in retirement — and that’s by counting on its success. As a business owner, I’ll tell it straight — running and growing a business is the hardest thing I have ever done.
I’ve married and divorced, written a book, come close to death from complications from a motorcycle wreck, jumped out of an airplane three times, been through a lawsuit in federal court — none of these things come close to the challenges of running a business.
I’m not trying to talk you out of it. Just letting you know what you’re in for. It needs to be in your blood. And you cannot count on its success.
Kauffman Foundation research shows the share of retirement-age entrepreneurs (ages 55 – 65) grew from 14% to 23% from 1996 to 2012. This makes sense to me. At this age you’ve got the experience, and often the money. But that may not be enough.
Here are three things to think about before you start a business in retirement:
Are you cut out for this?
You may have the best idea ever. That doesn’t mean you’ll enjoy the trials and tribulations that come with starting and growing a business. Are you ready to put in the hours you would with a newborn child? Are your leadership skills strong enough to develop a culture that will propel your business to success? What if it doesn’t work out?
Get to know yourself before you embark on this adventure. Use assessment tools to gain in-depth knowledge about your own talents. I’ve taken almost every assessment tool that’s out there. The one I’ve found most useful is Kolbe, a tool that measures your natural instinctive way of approaching problem solving. It has helped me value other team members who think differently than I do. I’ve also found Predictive Index to be quite useful in understanding my team member’s strengths.
Talk to other business owners. List your strengths and your weaknesses. You’re going to need to wear many hats. You’ll need to figure out which ones you should wear, and which ones you should hire for. Be willing to pay for good help. And consider hiring a business coach. A good one will keep you focused on the path to success.
How much of your money do you use?
Don’t be naive. Too many aspiring business owners think they will write a business plan and head to the bank, or to an online crowdfunding site, and someone will hand over the capital they need. Sure it could happen, or you could win the lottery.
Chances are you’ll need skin in the game. Do you tap home equity? What about liquidating retirement accounts? You’ll need to explore the risks and tax consequences of various self-funding options.
When it comes to cashing in retirement accounts I flat-out don’t like the idea because retirement money has some unique creditor protection provided to you. Money in your 401(k) plan is protected at the federal level. Up to $1 million of IRA money is protected from bankruptcy. For anything other than bankruptcy, creditor protection on IRA money varies from state to state. Your retirement money is your nest egg — be cautious about risking it on a startup business.
If you decide there is a portion of your retirement funds you’re going to use, for those with larger account balances, there are ways to use the funds without cashing out. I talked to David Nilssen, CEO and co-founder of Guidant Financial about an option which involves setting up a corporation and your own 401(k) plan, then directing your 401(k) plan to buy company stock. I’ll be honest, I thought I was going to be starkly opposed to his solution — but it turns out for the right person, I think it works well. It is 100% legal, you just have to set it up correctly.
David says that over 60% of the people they are working with are buying into a franchise concept of some sort. Buying into a franchise offers a pattern for success and helps reduce many of the typical risks associated with a true startup.
Regardless of how you fund your business, the key is making sure you have a backup plan.
What is your Plan B?
Before you start your business, develop a Plan B. That involves running future projections as if your business fails, and the capital you invested is gone. In that scenario, is life still palatable?
I’ve seen too many people put too much money into a business trying to keep it afloat. If it doesn’t make it, they’re wiped out. Don’t do this. Commit assets to Plan B so you have something to fall back on. Sure, the glamorous stories about a business owner risking everything and finding success have romantic appeal. Journalists seek out those rare stories because, well, they make a good story.
This exercise isn’t about a cup-half-empty view of the world. It’s exactly the opposite. It’s about freeing up your mental energy to start your business with confidence. When you’ve answered the “What’s the worst that could happen” question, there’s not much left to worry about.
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