Launching a business—whether it's a side hustle or second career—is on the minds of many people these days, especially baby boomers. As they get ready to retire, or are laid off, more and more baby boomers are feeling the entrepreneurial spirit.
Research from the Kauffman Foundation shows those who are 55 or older have the highest rate of entrepreneurship in America, and they're almost twice as likely to be successful as those in their 20s and 30s. But starting a business certainly has its challenges.
While those who are starting businesses in their 50s may have developed a wealth of expertise and contacts over the years, they often have the wrong mindset, says small business expert Melinda Emerson, the best-selling author of "Become Your Own Boss in 12 Months."
"Some think that, after having a successful career in Corporate America, running a small business is going to be easy," Emerson said. "They have to shift from everything being done for them. Now they have to do it. When they put their shingle out, they're taking on 14 jobs—from clerical to IT to sales to research and development. That's a lot that they're taking on."
So before taking the leap, boomers should avoid making these three common mistakes that could sink their startup:
If you don't have a well-developed business plan, you can't expect your business will become a viable entity. In addition to the company overview and strategy, your plan should provide analysis of the business environment and a financial review (income statement, balance sheet, cash flow statement, profit projection and budget.)The Small Business Administration has a "Business Plan Tool" on its website to walk you through the steps you need to follow to complete your plan.
Also do a "break-even analysis" to determine when the business can make money. Starting a new business costs more than $30,000 on average, according to the Kauffman Foundation, although freelance, online and home-based business can come in a lot lower. While the timing varies, Emerson says it can take at least 18 months or more for many startups to become profitable.
Focus on money management from the start. Many financial advisors say relying solely on your savings means you're likely operating your business at a loss. Yet a recent survey by the National Association for the Self-Employed found 80 percent of women business owners used their personal finances to start their business. Using some of your personal savings is fine, as long as you don't jeopardize your other financial goals.
Emerson recommends having three pools of money: the first year's worth of working capital, an emergency savings account for your business, and an emergency savings account that has the equivalent of six to 12 months of living expenses to help run your household.
Before you start your business, talk to a financial advisor about how you will obtain the funds needed. Be careful about raiding your retirement savings. If you're over 50, you won't have as much time to recoup any losses. You also need to figure out how you're going to structure your company. Will it be a sole proprietorship, LLC, corporation or another type of entity? Having an attorney and accountant on your advisory team can help you determine licenses and permits needed and tax implications.
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To find an expert in your area, try one of these sources: the Financial Planning Association for a financial advisor, the American Bar Association for an attorney and the American Institute of CPAs for an accountant.
(An earlier version of this story misspelled the name of the Kauffman Foundation.)