Franchise Buying Guide

Franchise Funding Options

Factors in Your Favor
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

To be sure, banks like hard numbers, and whether you're applying for an SBA loan or any bank loan, you need to know what lenders are after. As always, solid business plans with strong financials and a great credit history are musts. Industry experience, or a related history, is a big plus. But perhaps equally important, says Reilly, is a franchise company with a proven concept. "The lender is going to be focused on how strong the organization is and what kind of support it can give the franchisee," she notes. The stronger the franchise company and the longer it's been in business, the better the loan terms will be, and, generally, the less you'll have to ante up in terms of equity.

If the franchise company hasn't been in business that long or the lender isn't familiar with it, be prepared to sell them on it with strong numbers. "The first contact you have with the lender, you want to impress," says Jeff Rosenfeld, managing partner at Kessev Finance, who recommends providing a detailed explanation of how you plan to save money on equipment and supply arrangements, your research on buying vs. leasing, your plan for hiring and managing employees, your plan for finding real estate and so on. "That indicates you have been thinking about this like a business-person," he says.

It's also a big boost to have a spouse still earning a regular paycheck outside the new franchise. "That way, the lender knows you can pay personal living expenses while developing the business," says Anderson.

That was the case for Howard Taylor, 40, who decided to leave his job as a raw materials planner at Plastipak Packaging to open a Nestlé Toll House Cafe franchise in Novi, Michigan, which is scheduled to open next month. His wife Alisa's job has provided steady income as he's worked to get the franchise going. "[Lenders] consider that a 'soft landing,'" says Taylor. "My wife makes more than I do. So that was even more attractive to them."

Tapping Retirement Funds
With the help of Derrick Skogsberg of FranFund, a Carrollton, Texas, consulting firm, Taylor successfully applied for an SBA loan through Small Business Loan Source, but he was able to take a smaller loan by using his 401(k) funds to partially bankroll the business. It works this way: Taylor rolls over his 401(k) assets of about $100,000 into a new profit-sharing company set up by FranFund, which then buys stock in the new Nestlé Toll House Cafe. "I don't have to amortize that $100,000 over 10 years and am not paying a penalty to access the funds, or the 28 percent income tax on top of it," says Taylor. "That's very attractive."

Some consider it risky to tap retirement assets for a new business venture, but Taylor sees it as a natural fit. "My wife and I did a lot of soul searching about it, to say the least," he says, adding, "In the end, we were willing to take that risk and build equity in something we were managing rather than leaving it up to someone else. My 401(k) is still invested for my retirement-I just have more control over its performance now."

Several companies now offer similar solutions for investing retirement assets into a new franchise, including BeneTrends, Guidant Financial Group and SDCooper Co. If you choose to go that route, show the plan to your accountant to make sure you're not running afoul of any IRS rules. (See "Cracking the Nest Egg" on page 112 for more on using your retirement funds.)

The one big advantage of using retirement assets, say Siegel, is that they're yours. "There's no debt to repay," he says. As for the risk involved, it may not be that different than the risk associated with loans that call for personal assets as collateral. With enough careful planning and due diligence, you can mitigate the dangers, but any business venture is a risk. "And sometimes in life," says Siegel, "you just have to take a risk."

For more information on getting financing, go to's Money Channel.

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This article was originally published in the January 2007 print edition of Entrepreneur with the headline: Show Me the Money.

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