Creative Franchise Financing With Retirement Funds
Did you know that a franchise purchase can be financed with one’s own retirement funds (IRA, 401(k), etc.) before retirement age without incurring additional taxes or penalties?
There is such a financing strategy, and it’s enabling thousands of franchisees to purchase the business of their dreams. The amazing thing is that this structure not only allows them to buy the business in its entirety -- or use their funds as a down payment on a loan -- but it helps them to build their retirement nest egg at the same time.
Through an account structure similar to self-directed IRAs and Employee Stock Ownership Plans (ESOP), the purchase of a business or franchise can be made with retirement monies as an investment on behalf of that retirement account. If a client chose to tap their IRA without using this strategy, they could lose up to 50% of their retirement account’s value through early distribution penalties and taxes.
This strategy not only enables franchisees to avoid high-interest loans and thus lower overhead, but it also allows them to grow their retirement funds through the success of their new business. As the business grows in value, so does the retirement account and profits can be deposited, tax-deferred, back into the account or reinvested in the business. Business owners are also able to add up to $45k per year to their retirement account through deferrals and contributions (and up to $50k if the client is over 50 years of age).
And the structure is remarkably flexible: Not only can franchisees use all or a portion of their retirement money, but they can combine their funds with money from business partners for a multi-party purchase. It’s an ideal strategy for husband-and-wife teams.
So why is this possible? When congress enacted the Employee Retirement Income Security Act of 1974 (ERISA), it turned over the responsibility for retirement plan investing from the employer to the employee. This means that, with only a few exceptions, individuals can choose how and where to invest their retirement money. That is, as long as those investments are for the soul purpose of growing their retirement account and not for their spending pleasure now.
When using this unique account structure, a franchise purchase is an investment similar to the purchasing of traditional stocks and bonds. In this nontraditional scenario, however, the franchisee invests in a business privately controlled by the franchisee -- not by the board of a publicly traded company.
If you have $40k or more in a retirement fund you would like to use to invest in YOUR own business, call The Franchise Maker at 877-615-5177 to discuss how you can do this!
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