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Finance Your Franchise With Retirement Funds If you're having trouble getting franchise financing from the traditional sources, consider this alternative.

By Jeff Elgin

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There just isn't any financing available! That's the refrain everyone hears when discussing the biggest issue facing people who want to open a franchise in the current economic climate. The fact is that there is more truth to this statement than anyone in the government or banking business wants to admit, and it doesn't look like it is going to change anytime soon--at least as far as traditional loan sources are concerned. Standard bank loans, loans secured by the equity in one's home, SBA loans--these are all things of the past for most people.

So, what's an aspiring franchisee to do? Well, there is a ready solution that is being used more and more every day. It allows people to fund their business ownership dreams using the dollars they have built over time in their qualified retirement accounts--an untapped source of investment capital that most people haven't even thought of. Imagine funding your franchise without incurring any debt or having to pay interest. You can invest in yourself and retain a great deal of control over how successful that investment ultimately becomes.

You can access this money without incurring taxes or early withdrawal penalties, but you do have to be very careful to make sure you follow all the rules. There are two approaches to sourcing money from your existing 401(k) account; one is very simple and the other is more complicated.

The simple approach is to borrow the money. You can borrow up to 50 percent of your account or $50,000, whichever is less. You do have to set up a regular repayment plan (including paying interest on the outstanding loan balance at a reasonable level,) but getting this much money on this basis is usually very easy to accomplish. Contact your 401(k) plan administrator to learn the specific rules for your plan.

The more complicated approach involves using a transaction often referred to as a ROBS plan, which stands for Rollovers as Business Startups. This plan doesn't have the smaller limits and repayment requirements of a direct 401(k) loan, and it can also be used with an IRA account. In a nutshell, you set up your new company, establish a retirement plan within the company and then transfer your existing retirement dollars into this plan. You are then free to direct the investment of these dollars in whatever manner you consider to be the most effective--including an investment in your company's stock--by a process as easy as writing a check.

There are, of course, pros and cons to this approach to franchise funding. Some of the often quoted advantages include:

  • You have more investment options. You can direct the investment of your funds into various business or real estate opportunities that you select, not just into stock and bond mutual funds which are often the limits set by other retirement account plans. This allows you to diversify your investments to try to create more wealth while maintaining a single account structure.
  • You can minimize fees. There are typically no transactional or asset-based fees involved in a self-directed retirement program. This can save thousands of dollars per year compared to traditional fees charged by other retirement fund providers, especially when your asset balances are significant. You can also avoid up front commission expenses that may reduce the overall return in some traditional plans.
  • You have more control. You can react rapidly to investment opportunities without burdensome restrictions that other custodial providers may impose on you. If and when you decide an investment is the right one, you are free to make it without cumbersome paperwork requirements and delays.

On the other side of the equation, there are some common concerns that you should be aware of, including:

  • You will need professional help setting up a ROBS plan in order to ensure that you meet all IRS procedures and requirements. There are a number of companies like FranFund, Benetrends and CatchFire that will assist you in setting up this sort of program as they have done for thousands of other people in like circumstances. This is not something you want to do by yourself, so make sure to access expert assistance.
  • You will have some costs setting up and maintaining this sort of self-directed retirement account. You will likely have to pay a few thousand dollars in up front fees to one of these facilitation companies to assist you in setting up the proper structure for this sort of program. In addition, you will also typically pay fees to a maintenance organization (which may be the same company that set up your program) to manage the annual filing duties required of this type of plan. The charges for this type of ongoing service typically run from a few hundred to as much as a couple thousand dollars per year, depending on the provider. You'll want to interview a few companies in this arena to select the one you feel most comfortable working with.
  • You are putting both your current income and your retirement funds into the same risk equation. In normal circumstances, the common assumption is that your retirement funds are invested in a way that protects them even if you lose your job or your current company goes out of business. In this case, when your retirement funds are being invested in your own business, the level of diversification you accomplish is limited. Some may consider it more prudent to keep these two facets of your financial life separate, but there are no guarantees in traditional forms of investments like stocks and bonds either.

Probably the single biggest advantage of using a retirement fund rollover to finance your franchise is that your investment decisions become yours and yours alone to make. You don't have to worry about someone else arbitrarily deciding that you should not be funded or putting restrictions on you that you don't think are fair or appropriate. If you decide that using your retirement accounts as a funding vehicle is the way for you to go, then it's just a matter of completing the paperwork. You are in complete control and can pursue your franchise ownership dreams--even in today's uncertain climate.

Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.

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