When Retirees Succeed at New Businesses — And When They Don’t

Help clients assess these important questions before they embark on a new venture.

By Greg Sullivan

A while back, I was playing in a charity golf tournament with Harry and Jim, and they both told me they had tried to retire a couple of times. Harry explained, “You know, I retired once already and I am having to figure out how I can retire again. We have over a hundred employees and other businesses counting on the work we do.”

When Harry retired the first time, in his late 50s, he thought he would start a small consulting firm and maybe hire a couple of people to support his work. As luck would have it, the business took off. Not one to miss an opportunity, he kept growing the company and now has offices around the world, and is busy traveling and working 50- and 60-hour weeks, not something he had expected to be doing in his mid-70s.

There are people who enjoy working long hours, even in their late 60s and 70s. But sometimes they get stuck on the merry-go-round and can’t seem to get off, even if their life is not quite what they want it to be. Although Harry may not have as much free time as he sometimes wished, he didn’t regret starting his business. His work supported who he was and gave him an identity as a successful CEO and entrepreneur, and that made him feel good. Harry’s family would have liked to spend more time with him, but, overall, they supported his work and his desire to stay in the game.

Jim wasn’t quite so lucky. After he retired for the second time from a career as a marketing executive, a close friend came to him to discuss a business idea. Jim had been very successful in his career, and a friend thought they would be great business partners. Jim said, “At the time, I was full of energy and got excited thinking about building a new, cutting-edge business.”

The business idea was for a cool new home safety product, which required design engineers, a manufacturer, and a distribution and sales system. All of those areas must be executed well if the business was to be successful. At the beginning, everyone was gung-ho, and Jim agreed to act as CEO and to finance the business.

I asked Jim if a financial advisor or his accountant helped him analyze the business structure or had provided financial analysis. He said no but that he and his partner had prepared some initial projections and built a business plan. Given the tone of his voice, I realized that this business did not end well, so I asked Jim a few questions out of curiosity: Were there other investors helping to support the business financially? Did you or your partner have experience building a start-up business and manufacturing a product? Most importantly, since you are currently retired, were you able to protect your financial independence?

We had a great conversation, and I learned a lot about what could and did go wrong. Sadly, Jim lost more than $1 million before he and his partner realized that they had to shut the business down. He told me, “I am retired, but my wife and I are not at the comfort level I thought we would be at this time in our lives.”

If a client’s work life has been go, go, go for decades, stopping suddenly can be difficult. After all, the person is shifting from a workday in which nearly every minute of time is scheduled and he or she is in constant demand to a daily routine in which there may have nothing of great consequence to do, no place to be, and no one counting on him or her for insight or acumen.

The first thought when confronted with such restlessness may be, “I’ll get a job, something less demanding, or possibly I’ll start a business!” It’s exciting to think about new ventures, to look forward to building a business that combines interests and strengths. And many people in retirement have a great deal of vision and talent to offer, as well as time. Embarking on a second act as an entrepreneur or self-employed business owner is increasingly common, as people remain healthy and active often late into their lives. Starting a business can be a great way to use your time and energy and to earn additional income, which may be especially welcome if you’ve retired early, either by choice or because of restructuring in the company you worked for.

But when zeal untethered from reality meets lack of experience and preparedness, a host of problems can ensue. One client’s experience offers a case study in the things that can go wrong — and allows us to look at how the business could have been better organized and launched.

Dan had made a lot of money as a manager at a multinational pharmaceutical company; he’d worked hard, been in the right place at the right time, and done very well with his stock options. He then retired at a relatively young age, choosing to move back East, to a part of the country where he and his wife had grown up. There, they could raise their kids near family and old friends, and enjoy life at a slower speed.

Perhaps unsurprisingly, given his young age and previously demanding job, Dan found the pace too slow and began to grow bored. Finding another traditional job did not interest him — he’d done the daily grind in a corporation for decades already and knew he didn’t want to deal with the hierarchy, pressure, and long hours that came with work in a big company.
Dan’s level of wealth allowed him some flexibility — he didn’t need to bring in a great deal of money because his portfolio would support his family’s lifestyle — and he had lots of ideas for innovative products in the health-care arena. He began to get excited about the multitude of possibilities, and envisioned a bright future with himself at the helm of a pioneering start-up that would ultimately change the way people stay healthy.

The next thing you know, Dan has started a new company, included a couple of partners who were interested in his idea, and sunk considerable cash into launching the business. While his idea for a health-tracker app showed promise, he was entering a rapidly burgeoning market and he had no background in running a start-up. Building a successful business from the ground up requires a set of skills quite different from those needed to manage people and projects at an established company, and it’s a set of skills that very few people have.

In his exuberance, Dan moved forward quickly, taking on partners, hiring employees, and leasing space. Unfortunately, he didn’t stop to consider the legal and financial ramifications of these decisions. Dan was moving fast, with great enthusiasm and energy, and soon things weren’t going well for his company. With no formal partnership agreements in place, the responsibilities of the partners were unclear, and Dan’s position as sole guarantor of the lease and other contracts left him vulnerable. He had not run a company before and didn’t realize how easy it would be to get caught up in lawsuits with unsatisfied partners and investors when the business began to falter. Because he believed in his idea wholeheartedly, Dan found it impossible to know when to quit, and ended up losing hundreds of thousands of dollars instead of making hundreds of thousands, or even millions, as he had dreamed.

Five Qualities or Skills All Entrepreneurs Need
When a client comes to us and floats the idea of starting a business, we want to encourage him or her. After all, many people could use additional income to support the lifestyle they desire in retirement, and many have contributions they yet want to make to the world. We don’t want to dampen the person’s enthusiasm — but we do want to help her evaluate whether she has the experience and skills she needs to be successful as an entrepreneur. And we want to help her put boundaries around the venture so that assets essential to her long-term well-being are protected. Unfortunately, unbridled enthusiasm can be difficult to slow down and redirect.

My experience has shown me that not everyone has what it takes to flourish as an entrepreneur. After founding and running, with my partners, a thriving wealth advisory firm, I’ve learned that you need certain traits to do well. Here are five essential qualities or skills you must have if you are to succeed as an entrepreneur:
1. You need to have a strong vision. You must be able to see clearly what you want to build and have the passion to follow through on your goals.
2. You must be a good decision maker. As an entrepreneur, you will be responsible for executing your business plan; you must be able to generate a range of potential solutions to problems, evaluate all the options, and decide quickly and confidently on the course that will lead to the best outcome.
3. You need to manage risk appropriately. Starting a business is inherently risky — that’s just the nature of entrepreneurship. But a successful entrepreneur knows how to evaluate risks and choose wisely, how to minimize the downside, and when to cut her losses.
4. You must be a good listener. Being open to the opinions and suggestions of others means that you will get greater insight into the strengths and weaknesses of your business and will get more feedback that can help you head off problems or generate solutions.
5. You need to be a great communicator. You have to be able to share your vision with others — partners, employees, investors, customers — and you must be able to effectively communicate goals and expectations for everyone in the company.

Before beginning any entrepreneurial venture, help a client make an honest assessment of his skills. If he is deficient in one or two of the qualities on this list, he may be able to develop them, or he may find a partner who can fill in those gaps. He might also learn that he is not well suited to the uncertainty of a start-up and would find another type of work more satisfying.

Setting Up for Success While Minimizing Risk
After we listen to a client tell us about her business and why it is such a great idea, we explore with her the worst-case scenario, taking the role of devil’s advocate. The client is often not prepared to answer the questions we pose, but the conversation gets her thinking about the business and the financial risk involved. It also helps draw a line in the sand; if she approaches that line, she should completely reevaluate whether it’s worth going forward. (Learn here how to Help Clients Avoid Becoming Vicarious Entrepreneurs.)

New entrepreneurs need to think through the business model for their venture and make a realistic assessment of the associated costs, which they tend to underestimate. It’s also important to consider a few questions: What are the legal ramifications of the particular business, and what safeguards should you have in order to operate with a reasonable amount of risk? Who do you have in place to keep you accountable?

When you help a client through his business model, think in terms of the five “P’s”; if he can develop a written plan that incorporates these five essentials, he greatly increases his probability of success.
1. Purpose: This is your company’s mission and set of beliefs. You and your partners and employees must be clear about why you are in business and how you will operate as you work toward your goals.
2. People: You need an understanding of the skills (both technical and soft skills) of people you need to be part of the business. Who will make good partners? Who will make good employees? You also have to understand the needs and aspirations of the people you are serving, your customers or clients.
3. Process: It is important to establish business processes that let you manage operations, scale the business, and work efficiently.
4. Price: Your pricing model must make sense for your business and also for your customers or clients. In order to develop a solid pricing strategy, you’ll need to know your customer, tally your costs, assess your competition, and decide on how much revenue you need to, want to, or can generate.
5. Profits: Profits are, of course, linked inextricably with your revenue targets, and thus your pricing model. You should look realistically at what your opportunity for profit will be, given all the information you gather as you set pricing, and decide whether the investment is worth it.

Once you have your five P’s in order and have determined that you’re ready to move ahead, you can save yourself a lot of grief if you formalize agreements. Pro forma financial statements, clear operating agreements, proper employee contracts and work policies, vendor agreements, and so on are all necessary to establish guidelines by which the company will operate and to outline expectations for the various parties.

Many companies start without an operating agreement, but this is not a good idea if you have partners with a financial interest in the business, whether that is your best friend, son, daughter, or other investors. In fact, some states require LLCs (limited liability companies) to have operating agreements in place.

The operating agreement governs the internal operations of the business in a way that suits the needs of the owners; it structures your business’s finances and organization, and provides rules and regulations for its operation. The document typically includes percentage of ownership interest, allocation of profits and losses, and members’ rights and responsibilities. Be sure to include provisions for issues you think are important: What happens if one of your partners or investors is fired or quits the business — how do you handle his investment? How do you handle a partner’s investment if she becomes ill or dies? How do you make the decision if one investor wants to sell and the others do not? These are often tough discussions with the other investors, but it is important to establish firm rules in advance and know that everyone is playing by them. Without such agreements in place, you open yourself up to nasty misunderstandings at the least and costly litigation at the worst.

While there is a great deal of background information in books and online about operating agreements, it is wise to have an attorney draft or review the final agreement. And clients should consult you before signing any agreement that concerns your income, assets, and liabilities.

Our entrepreneurial client Dan could have saved himself a great deal of pain and financial stress if he had slowed down and assessed carefully his own skill set and the skills necessary to build a start-up health-care technology company. If he had recognized that he was stepping so far outside his sphere of expertise, he could have taken on partners who could help fill the skills gap; and with proper agreements in place, he could also have better shared the financial liabilities among partners.

I should note, however, that taking on partners carries its own complications. While most of us think of a business partnership as chiefly a financial relationship, it is in many ways more like a marriage. The relationship is as emotional as it is financial. And the more partners you include, the more complex the relationships may be, with alliances and animosities forming and shifting over time.

I am so fortunate with the partners I chose three decades ago. Jim Bruyette and Pete Speros have been with me since the very beginning of SBSB. Our other initial partner, Eleanor Blayney, retired from our company several years ago. We have had our fair share of arguments and disagreements, but in the end we always trusted and respected one another, just like in a well-tested yet strong marriage.

As with any relationship, a business partnership is most likely to prosper if partners agree on clear goals at the outset, define roles and responsibilities, and communicate effectively, frequently, and with respect.

Greg Sullivan, co-CEO of SBSB Financial Advisors, is author of “Retirement Fail: The 9 Reasons People Flunk Post-Work Life and How to Ace Your Own,” published by Wiley. This article is an excerpt from the chapter, “The Lure of the Entrepreneur.”

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