Leveraging a 401(k) Rollover to Finance Your Franchise Purchase
Investing in a franchise can be an exciting opportunity for aspiring entrepreneurs. Buying a franchise allows you to utilize a proven system on which to build your own business. It’s a tried and true method that many entrepreneurs have used to create wealth and live the life of freedom only available to those who own their own business. A client of mine recently asked, “why doesn’t everyone do this?” (referring to the purchase of a specific franchise), and the answer is a simple one - not everybody has access to the capital necessary to start a franchise.
Or, so they think...
If you want to have access to the substantial resources created by the franchisor, there is a price of admission, and obtaining the necessary capital for such an endeavor can pose a significant challenge for the majority of “middle class” Americans. The startup costs of opening your own franchise can range from $65,000 to multiple millions of dollars. So, what do you do if you don’t have the money?
Today we’re going to explore an under-utilized way of funding a franchise - the 401(k) rollover, AKA Rollover as Business Startup (ROBS)! While traditional funding options like bank loans and personal savings are commonly utilized, the ROBS is worth exploring, and provides substantial benefits to the aspiring franchise owner. If you have at least $50,000 in your 401(k), you could use it to purchase your franchise! Keep reading for an in depth look at this seemingly magical way to purchase a franchise.
I. Understanding the 401(k) Rollover:
Before we explore the specifics of using a 401(k) rollover to fund your franchise, let's first establish a clear understanding of what it entails. A 401(k) rollover is the process of moving funds from your employer-sponsored retirement account to another. In the case of a ROBS, what you’re essentially doing is taking the funds that you have invested in publicly traded companies and mutual funds, and using it to buy shares of YOUR new company/franchise.
The money in your 401(k) is YOUR MONEY, and it’s just sitting there being tossed to and fro by forces completely outside of your control. By executing a ROBS, you’re taking control of the monies invested in your 401(k), and betting on yourself.
II. Advantages of Using a 401(k) Rollover:
1. Preservation of Tax Advantages:
One of the primary advantages of utilizing a 401(k) rollover is the preservation of tax benefits. When you roll over funds from an existing retirement account to a new account, such as a self-directed Individual Retirement Account (IRA), you can maintain the tax-advantaged status of those funds. This means you can continue to defer taxes on your retirement savings until you withdraw them, allowing you to allocate a significant portion of your funds toward your franchise investment. Sure, you could just leave your job and withdraw the funds in your 401(k), but you’re going to pay a 10% early withdrawal penalty along with the state and federal taxes. So, unless you want 40% of your money to evaporate, you’d better look into a ROBS.
2. Access to Larger Capital:
Traditional funding options may have limitations on the amount of capital you can obtain. However, by tapping into your 401(k) through a rollover, you gain access to a potentially substantial pool of capital. This access can significantly bolster your purchasing power and increase the likelihood of acquiring the franchise you desire.
Traditional business loans will require a cash infusion (by you) of 30%. The ROBS does not. You can access some or all of your money to fund your business with little out of pocket. Most ROBS can be implemented with around $5,000 plus a small monthly management fee. This provides you the ability to keep your cash to cover your living expenses while you ramp up your new business.
III. The Process of Utilizing a 401(k) Rollover for Franchise Funding:
1. Consultation with a Qualified Professional:
Before proceeding with a 401(k) rollover, it's essential to seek guidance from a qualified professional, such as a financial advisor or tax consultant (to access our preferred vendor network, click here). They can help you navigate the complexities of the process, ensuring compliance with relevant regulations and providing personalized advice tailored to your situation.
2. Setting Up a Self-Directed IRA:
To facilitate the rollover, you'll need to establish a self-directed IRA. This type of account grants you control over your investment decisions and allows for a wider range of investment options, including the purchase of a franchise. Choose a reputable IRA custodian that specializes in self-directed IRAs and understands the intricacies of franchise financing.
3. Rollover Execution:
Working with your chosen IRA custodian (this is where you will be spending the aforementioned $5,000), initiate the rollover process by transferring funds from your existing 401(k) or retirement account into the newly established self-directed IRA. It's crucial to ensure that the rollover is executed correctly to avoid any penalties or tax implications. Your IRA custodian will guide you through the necessary paperwork and facilitate the smooth transfer of funds.
4. Franchise Evaluation and Selection:
Once your rollover is complete and your funds are in the self-directed IRA, you can begin exploring franchise opportunities. Conduct thorough research, evaluate different franchises, and assess their financial viability, growth potential, and alignment with your interests and skills. It's crucial to choose a franchise that suits your goals and has a solid track record of success.
Click here to schedule a time to speak with a franchise expert to help you in the process of identifying the right franchise.
5. Utilizing IRA Funds for Franchise Investment:
After identifying the franchise you wish to purchase, your self-directed IRA can invest the funds required to finance the franchise. This investment can be structured in various ways, such as through the purchase of stocks, membership interests, or through a promissory note. It's essential to work closely with your IRA custodian and legal professionals to ensure compliance with IRS regulations and avoid any prohibited transactions.
IV. Potential Challenges and Considerations:
1. Risk and Return:
Investing your retirement savings in a franchise involves inherent risks. While franchises can offer significant returns, there's also the possibility of failure. It's crucial to conduct thorough due diligence and seek professional advice to assess the financial viability and potential risks associated with the franchise you intend to purchase. The franchise experts at Revolution Franchise Brokers can help you to find the franchises that will give you the best chance for success. Click here to schedule your free franchise consultation.
2. Limited Access to Funds:
Once your retirement funds are invested in a franchise, access to those funds for personal use may be limited until you reach retirement age. It's crucial to plan your personal finances accordingly and maintain a separate emergency fund to address unforeseen circumstances. Although you will have limited access to the funds from your IRA/401(k) for personal use, you will likely be able to pay yourself a salary through your new franchise. And since you control the business, you will also be able to pay yourself bonuses/commissions/etc.
3. Regulatory Compliance:
Using a 401(k) rollover for franchise funding must comply with IRS regulations, including the prohibition of certain transactions, such as self-dealing or personal use of IRA assets. It's crucial to consult with legal professionals and maintain accurate records to ensure compliance and avoid any penalties.
Using a 401(k) rollover to fund the purchase of a franchise can be an effective strategy for aspiring entrepreneurs seeking alternative financing options. By leveraging the tax advantages and access to larger capital offered by a rollover, you can take a significant step towards achieving your entrepreneurial dreams. However, it's vital to proceed with caution, seek expert advice, and conduct thorough due diligence before committing your retirement funds. With careful planning and proper execution, the path to franchise ownership through a 401(k) rollover can pave the way for a rewarding and prosperous entrepreneurial journey.
What to do Now:
If you're ready to begin your franchise ownership journey, we're ready to help. Schedule a free no-obligation franchise consultation by filling out the form on this page: https://www.revfran.com/book-a-strategy-session