Some people are born to be entrepreneurs. It’s doubtful that Colonel Sanders of KFC fame was one of those people. Although he had a lifelong skill and love for cooking, he didn’t sell his first Kentucky Fried Chicken franchise until he was 65 years old. At that time, he was semi-retired and reliant on a $105/month Social Security check. Before that, Sander’s career was a long history of odd jobs, including short stints as a lawyer, a railroad conductor, insurance salesman, filling station operator, ferry boat captain, and a military man. But after all those jobs and over 40 decades of hard work, sweat, and tears, 65-year-old Col. Harlan Sanders had little to show for it financially. Then he started KFC, which he then went on to sell at age 73 for about $10 million (in 2017 dollars).
His story is a great example of how it’s never too late to follow your dreams. In an internet-driven age when the latest crop of self-made billionaires can seemingly barely grow facial hair, it can often seem like it’s too late to venture out on a new path. But sometimes later in life is the perfect time to “turn over a new leaf.” You might have stumbled onto an idea that you just can’t pass up. Or, perhaps your combination of experience, temperament, and perspective is just what the market needs. Maybe the ageism of corporate America has made workplace opportunities more and more scarce for you. Whatever your reason, now could be the time to embrace the challenge of becoming a business owner.
If that’s you, here are a few things to think about before you make the leap. As a financial advisor, I’ve seen many clients go down the path that you are about to embrace. And the reality is that according to the Small Business Administration, about half of new businesses don’t survive five years. And if you’ve been able to save up some money for retirement, you should think long and hard before you go and jeopardize that capital. One of the hardest things in the world to do is to save up a lump sum of money, and that money, if invested wisely, can be converted into an income stream that will last the rest of your life. So with all that in mind, here are five things to consider to start your business in a smart way, without threatening the financial security that you’ve taken so much effort to build.
What’s Your Household Run Rate?
One of the first and most obvious things you should do before quitting your job to start your new venture, is figure out what it takes to meet your current monthly household expenses. That may seem blindingly self-evident, but it amazes me how often people do not know the answer to that question. A guess is not good enough, you need to track your expenses for at least 3-4 months to have a good idea. And don’t forget to include once-a-year payments like homeowners insurance and taxes into the equation.
The reason for this is knowing the monthly nut you have to cover is vital to de-risking the entrepreneurial venture. Elon Musk is famous for living off a food budget of $1/day as a young man, so that he knew how much it would take to do the bare minimum to keep him alive. Once you know the monthly amount you need to cover, you can create a reasonable runway for your new business.
Create a Reasonable Runway
A pilot has only so much road to work with before he absolutely must get the plane off the ground. In the same way, a new business can’t flounder forever, it has to eventually make money.
In the initial planning stage of your business, you will need to have a general idea of how long it will take to get the business off the ground. And in the meantime, of course, you will want to have enough money set aside to fund your expenses. Then, if you can’t get it going before the runway runs out, you have time to think about other options.
Many entrepreneurs ask how they should invest these “runway” funds. My answer? When investing for short-term needs, it’s hard to argue against the safety of FDIC-insured accounts–checking, high-yield savings, money markets, or CDs. You won’t make much in yield with today’s low interest rates, but you have the guarantee of not losing your capital, even in the event of a bank failure. By contrast, if you tie your money up in the stock market, there’s no guarantee it won’t be worth less than you invested if the market goes down right before you need the funds for the business. However, if your runway is multiple years in length, you might consider a very conservative balanced account, but only for the part of your funds that are set aside for 3-5 years into the future. An allocation with less than 40-50% in equities (or other “risky” asset classes) is probably a good starting point to consider. Check out a robo-advisor like Betterment, Schwab Intelligent Portfolios, or Wealthfront to find easy-to-use portfolios for that purpose.
Consider a Franchise Instead
While the upside for a new business can be exciting, starting a new venture later in life involves a lot of risk as well. If you’ve saved up some money for retirement, you don’t want to squander all of that on a new business. In addition, starting a business will need capital, which means you probably shouldn’t be as aggressive in your investment portfolio. Why? Well, because what if a down market comes along, and your investments are down 20-30%, and at the same time you need to sell them to fund your business? Then you’ve sold at exactly the wrong time, locking in losses that you could otherwise allow time to rebound.
For all of these reasons, it may be safer to consider a franchise business rather than starting from scratch. Franchises have proven business models, with financial records to prove their success. In addition, they often offer training and support so that you aren’t “going it alone.” Of course, care has to be taken to analyze the different opportunities, but in this case, you have actual data to review at least, rather than just an idea in your head. To search for franchise opportunities, check out www.franchiseopportunities.com.
Can Your Business be Bootstrapped?
Nathan Barry of the email marketing company ConvertKit recently tells a story about how he bootstrapped his $5 million revenue company for three years without taking a dime of outside funding. He put in $65,000 of his own money, and the rest of the business’s funding came from customers. In other words, he funded the business step-by-step, and after three years of growth, he had a multi-million dollar profitable business, with no debt or partners/investors to answer to.
Bootstrapping a business may take a little longer, but it’s a much safer strategy, especially for those who are later in life, and don’t have as much time to recover should things not work out.
Will Your Business Be Adequately Capitalized?
Capital is like oxygen to a business. Nobody notices it when times are good, but when it’s gone it leaves the business on the ground gasping. If possible, you want the business to be capitalized in advance for the anticipated runway period and beyond. In addition, you might want to capitalize it with “other people’s money” rather than your own, if possible and if the terms are right.
One of the many ways to do this is with a small business loan if you qualify. Check out the Small Business Association’s website for more details on this program.
Starting a business at any age takes careful planning, but it’s even more vital when attempted later on in life. Take careful steps to figure out not only the business plan itself, but also your own finances to prepare yourself for the lean startup years. By carefully mitigating risk and preparing for the worst, you can build a successful business that will fund your golden years in comfort and style.