Investors may have more financing options available for buying a franchise than they realize.
More than $16.4 trillion is held in retirement plans nationwide, according to the Investment Company Institute’s latest research. This is 55 percent higher than five years ago. Franchising also experienced monumental growth during this time period. In 2006, many franchisors and franchise consulting firms achieved record levels as interest in entrepreneurship continued to rise. The growth within both retirement assets and franchising may not be a coincidence.
Trend watchers speculate that the baby boomer generation is leaning increasingly toward self-employment. Nearing the age of retirement, many realize they’re not adequately prepared to live comfortably in their golden years. Since 1999, surveys conducted by the AARP have regularly shown that as many as 80 percent of baby boomers wish to work during their retirement years.
Starting a new business can be intimidating and complex. Because of this, many individuals find comfort in using a franchise system that has already proven successful and that provides practical as well as moral support.
At the crossroads of growing retirement assets and franchising are a small handful of qualified providers who specialize in enabling individuals to acquire a franchise by investing their retirement funds into businesses without taking a taxable distribution or incurring penalties. Utilizing little-known tax code sections within ERISA (Employee Retirement Income Security Act of 1974), these firms are allowing individuals to go into business for themselves before retirement age by utilizing equity from their IRA or 401(k) instead of taking on debt in the form of higher-interest loans. Because contribution limits slow the accumulation of wealth inside a retirement plan, baby boomers’ larger IRAs mean that more retirement funds are available to those who wish to take advantage of this funding option.
When completed correctly, this funding solution is simple to operate and can provide outstanding benefits to the franchisee. Through a combination of a corporation and a 401(k), individuals can redirect up to 100 percent of their retirement savings into a new 401(k) plan that invests directly into their new business. It’s similar to the concept of investing retirement funds in shares of a publicly-traded company, except that in this case, it is a privately-held entity.
After making the investment into the new corporation, that cash-rich entity can now buy the franchise it deems to be the best investment. A significant advantage to those holding greater amounts of money in their retirement plan is that they may be able to purchase the franchise outright without taking on debt. However, should they require additional capital, this structure allows for leverage or for multi-unit purchases and larger business opportunities.
The purchase of the business is considered a legitimate investment, as the IRS has specified which investments are permissible. This is not considered a loan or taxable distribution. Because of this, there are no terms, no payments and no penalties. By mitigating if not eliminating debt, the money saved by not making interest payments can be reinvested in growth initiatives for the new business.
The immediate benefits are obvious, but those purchasing a franchise in this manner can also expect additional benefits over time, including lower business overhead and less—or eliminated—personal liability because they may never have had to pledge credit or other personal assets. Because the business also has an active 401(k), the business owner and any eligible employees are able to defer portions of their income into the plan and enjoy building additional wealth through one of the most powerful investment tools available.
Whether an individual is interested in buying a franchise, or is advising someone who is or will be looking to buy a franchise, those exploring financing options should consider this funding option and the pros and cons of utilizing it for their specific situation. That should include engaging an experienced attorney.
A leading expert in business financing with IRA or 401k funds, David Nilssen is the co-founder and CEO of Guidant Financial Group, Inc., of Bellevue, Wash. Guidant’s services enable account holders to direct retirement monies into traditional and alternative investments, including businesses. This can enable franchisees to start their business without incurring debt.
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