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small business 401k
Many Americans turn to franchising as the key to making their dreams of small business ownership come true. Yet every day, more and more of these aspiring entrepreneurs are discovering that their greatest challenge is not choosing the right concept, but rather gaining access to inexpensive capital needed to complete their purchase. To meet this challenge, a growing number of people are getting into the franchise business by investing in their own franchise—many of them using investment capital they didn’t know they had. Through a vehicle commonly known as Rollover as Business Start-ups (ROBS), entrepreneurs can use their IRA or 401(k) funds to invest in a franchise without taking a taxable distribution or getting a loan. 

The reality is there could be millions of potential franchise owners sitting on accessible capital that could be used today to fund their franchise purchase. Fortunately, word about this proven small business financing option is spreading, and FranData estimates that in 2010, more than 4,000 franchise entrepreneurs successfully acquired a franchise as a legitimate 401(k) investment. If we look at the numbers since 2005, industry experts estimate more than 10,000 small business start-ups have been capitalized in this manner, and more than half of those entrepreneurs worked with Guidant Financial, considered the leader in ROBS transactions. Those business owners are now reaping the rewards of much less overhead and a much greater chance for success.

In these challenging economics times, it appears to be the rule rather than the exception that lender capital is virtually non-existent for the average small business entrepreneur. Even SBA loans are frustratingly elusive: Between January and June of 2010, there was a 27% drop in SBA loans. Using money from one’s retirement accounts to finance all or a portion of a new business could be the best and often times the only funding option for today’s small business entrepreneur.

When set up by a provider intimately familiar with ROBS transactions, a franchise purchase can happen in a surprisingly short period of time. Guidant has streamlined the process to the point where 92% of its clients’ deals close in 21 days or less. The possibility of holding the keys to a newly purchased franchise in less than a month should be reason enough for franchise prospects to explore this option. But besides enabling an individual to avoid high-interest loan payments, this transaction empowers them to grow their 401(k) retirement nest egg while they grow their business. Rather than investing their IRA funds into the stock market and someone else’s enterprise, they are investing in their own skills and their own dreams.

In addition to launching a franchise business with no or little debt, the new franchise owner can enjoy even more benefits with this type of transaction:

  • Lower overhead, which means more money for purchasing advertising, equipment and other business needs;
  • A 401(k) plan for the business that can be offered as an attractive employee benefit – a benefit increasingly rare in small business today;
  • Retirement funds can be used as a down payment for a larger loan;
  • Funding can be obtained without using one’s home or personal credit as collateral.

So how does a ROBS form of franchise funding work? Foundational to this type of transaction is the fact that a 401(k) can legitimately hold both publicly and privately held stock. Using Guidant’s process as an example, the basic steps are:

  1. Guidant creates a private corporation for the client; the client then rolls their existing retirement funds into a new 401(k) plan.
  2. Once the money transfers to the new 401(k), the plan makes an investment into the newly formed corporation.
  3. The corporation, in turn, uses the investment proceeds to acquire a franchise or other small business, and the 401(k) becomes the shareholder.
  4. The new business now is cash-rich and debt-free – ready to purchase a franchise.

Because these 401(k) rollover transactions are quite complex, working with a small or inexperienced firm can potentially trigger substantial tax problems. Guidant has proven that it understands the importance of properly supporting individuals in the administration of these plans, and it takes its role very seriously. Because of its expertise and reliability, Guidant Financial is the only business within this niche industry to have been included in Inc. Magazine’s list of top 5000 fastest growing companies three years in a row. Not only does the company’s growth demonstrate that more franchisees trust Guidant to help fund their franchise, but it also points to an increasing reliance by small business on the ROBS form of non-traditional funding.

So is a ROBS right for everyone? The best way to determine eligibility is by researching the subject and consulting with experts, many of whom offer free consultations (see www.guidantfinancial.com). With only a minimum amount of effort, franchise entrepreneurs could discover that this remarkable funding option is the ideal way to launch their dreams for success.

Any individual, who desires to invest their retirement funds into a business through a rollover, should consult a knowledgeable and experienced attorney who is familiar with the ROBS transaction as Nilssen is not a tax or ERISA attorney and readers should not interpret this article as legal advice. He encourages readers of this article to get legal advice before attempting to utilize the strategies discussed.

About the Author:

David Nilssen is a cofounder of Guidant Financial. Guidant is the nation’s leading provider of rollovers for business start-up transactions.  His company has helped more than 5,000 individuals from diverse backgrounds invest their existing retirement assets into a small business or franchise. His company has been included on Inc. Magazine’s list of the fastest growing companies in America three years running and in 2007, Nilssen was recognized by the Small Business Administration as the National Young Entrepreneur of the Year.

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