Author: Jeff Elgin
Source: Franchising World October 2004; www.franchise.org

New Franchises open their doors with a retirement plan as the first order of business.

The choices for financing new franchises, especially those selling specific types of businesses, may benefit most from a relatively unknown type of product that allows individuals to use retirement funds to purchase new franchises-without penalties, without taxes, and without interest.  When transactions are structured properly, retirement funds can be used to purchase real estate, as operating capital, to pay franchise fees or, in some cases, to meet capital requirements for SBA loans.

Made possible through the Employee Retirement Income Security Act of 1974, this option ultimately allows a franchisee to control his or her own retirement funds-and future.  Rather than investing in a 401(k) or other plan monies in mutual funds or conventional stock portfolio, new franchisees invest the funds in stock in their own business.  This is accomplished through the establishment of a “C” corporation and a subsequent retirement plan for the new corporation.  Funds are then rolled over into the new plan, which purchases stock in the new corporation. 

While applicable to most any new business, it is especially useful for financing franchises that are home-based, vehicle-based, food-and beverage-related, or selling personal services.  Because these businesses are not secured by real estate, may often be smaller entities, or may be considered high risk, certain types of conventional financing simply may be considered higher risk, certain types of conventional financing simply may be more difficult to secure.

Just as this type of financing is especially attractive for specific types of businesses, it’s also attractive to specific types of individuals.  For years, Americans have been awarded for saving diligently in retirement funds.  Individuals between 40 and 55 years of age, especially those with long careers in corporate America, have often created substantial retirement nest eggs.  What’s more, they’ve spent the past 20 years allowing someone else to manage their nest eggs for them.  As they make the decisions to take the risks of self-employment, it’s only natural to invest in themselves.

A New Kind of Freedom

As franchisors, you may have met these new business buyers.  Or, if you’ve recently purchased or are thinking about purchasing a new business, you may see a bit of this in yourself.

Each week, the retirement plan specialists in our office meet 30 or 40 new franchisees by telephone.  They call us for assistance with financing, and very often the conversations turn personal.  After all, buying a business is an emotional process.  And we have found that for many, the decision to do so is the result of a life crises or major life change.  Many of our clients have recently lost jobs, burned out on executive life, made mid life decisions to realize their dreams, or decided to build family legacies by opening business with grown children.

The option to use retirement funds that seemed untouchable presents an entirely new perspective regarding the financing process.  For many, it’s an opportunity to “boot-strap” a new business-to get a fresh start without asking for help. For some, it’s a way to secure the help they need, providing capital and legitimacy for their transaction.  And for some, it’s a way to take control-to gain a certain kind of freedom – by investing in themselves the very funds they spent their former careers accumulating.

While it’s easy to get caught up in the sheer numbers of franchising, and the complicated options for financing, the use of individual retirement or pension funds seems to bring things back to basics.  You earned it.  Who is better to invest in than yourself?

A New Kind of American Dream

Small business has long been the mainstay of American dream, and it remains so today.  The entrepreneurial spirit is embedded deeply in our culture.  In recent decades, the ability to plan responsibly for our retirement has become deeply in our culture.    As good corporate citizens, we may enter into a bit of struggle with risk versus responsibility.

But we’ve found that for many, re-investing their retirement funds in self-owned business represents an answer to the struggle.  New franchisees open their doors with retirements plan as the first order of business.  Not only do they take calculated risks in themselves, working to earn the highest rate of return for their own funds, but also provide retirement plans for their employees.  It’s the very best of the American dream-using retirement funds to build more.