According to a franchise blogger over at AllBusiness.com;
"YES! It‘s high time we stop kidding ourselves and take control of our own financial security and stop allowing these so-called investment advisers from stealing our family’s fortunes through passive reactive investment vehicles."
What?
Just like that? Make a decision to invest a portion of your retirement saving into a franchise because your other investments have taken a 30% hit in the past year?
That is a wise choice. Not.
I really dislike some of the uplifting commentary concerning buying a franchise of your own. I am pro-franchise, but I'm not ethered up like some of my franchise com padres. There is room for positive article writing concerning franchise investing, for sure. Then there is the fake "YES! Invest in a franchise now, because I sell franchises, and make tons of money from selling franchises" type of article.
I make most of my living from the franchise industry. My role as a franchise consultant/broker is one of strategic matchmaking. When I make a successful franchise match, I receive a nice finder's fee from the franchise company I have matched my franchise candidates to. But, you won't find an article on this blog bestowing the benefits of franchising without a dose of reality included.
Franchising is not for just anybody. People fail. People who did not do their homework, and who did not learn how to research franchises have been fleeced in the past, and will continue to be. I try to help folks before it happens. I have no problem telling someone that they should "go find a job," because they just are not right for franchising.
Now, concerning using a portion of your 401-K or IRA to invest in a franchise or non-franchise business, sometimes it may be a good option. Sometimes it is not a good choice. In my opinion, if the "investment world" has not been particulary kind to your portfolio as of late, and you have been out of work for 10 months, dipping in to your 401-K to invest in a start-up franchise, that probably won't cash flow for the 1st year, may make the financial hole you are in, deeper. One that you won't be able to get out of, unless you find a job.
During times like these, don't allow someone to sneak up behind you, and apply the ether. Do your homework. If the opportunity makes sense, get a franchise attorney, an accountant, and a lender, who will be your support team. If everything looks good, take your shot!
What do you think? Should you use your retirement account to fund a business of your own?
Questions about any facet of franchising? Answers, here.
Anyone interested in implementing this strategy should read the latest IRS concerns in their Oct 1, 2008 Guidelines Regarding Rollovers as Business Start-ups (ROBS for short) at www.irs.gov/pub/irs-tege/rollover_guidelines.pdf.
It is worthwhile reading.
On a general broad business personal note: Why shouldn't we all have the ability to control our own retirement funds? I have been investing in all sorts of "alternative" investments from mine for over 15 years.
Posted by: Gary Anderson | March 26, 2009 at 04:40 PM
Rick,
Thank you so much for chiming in. You and I have worked with folks that have used this vehicle to invest in a franchise of their own, successfully.
I think the situation has to be right for one to do this, and I have no problem discussing it as an option.
The Franchise King
Joel Libava
Posted by: The Franchise King | March 24, 2009 at 12:20 PM
Joel,
I completely agree with you about picking the right franchise. As for using a 401k rollover plan there are some significant pluses:
1. The money is yours so it is not a loan. No loan, no principal, no interest to pay back. On a $200k loan that's about $4,000 a month. If you don't have to pay that you will reach positive cash flow sooner, often months sooner.
2. The right plan can provide a retirement investment vehicle that allows the owner to shelter up to $200k a year from taxes. This can be part of your wealth building plan.
3. There is no tax or penalty to be paid when you transfer money from your 401k (or is it a 201k) to a properly constructed plan.
4. The money can be used for any legitimate business purpose - including paying yourself a salary from day one.
5. Properly constructed setting up your plan will provide a $1,500 tax credit and the annual expenses are tax deductible.
6. SBA lenders like borrowers to use this kind of plan (ERISA) because the borrower has more skin in the game and getting a loan can be easier.
Picking the right plan just like picking the right franchise is important. Find a company that provides a written guarantee, one that has never had a plan rejected by the IRS, one that has a full time ERISA attorney on staff, one that doesn't require you to pay back the money in two or three years taking away money that could be used for expansion.
One final thought; make sure that the plan can be customized to fit your needs. Companies that offer a "one size fits all" solution make crank out the same thing day after day. Companies that customize plans take time to understand the situation and can recommend the best solution for each person.
Posted by: Rick Eggleton | March 24, 2009 at 11:47 AM
Mike,
Thank you for reading and commenting on my wildly popular blog.
From reading this post, one might think that I am against using a PORTION of an IRA/401-K to invest in one's own business. I actually Do think it can be OK, in SOME cases. As a matter of fact a couple folks that I helped put in business did use a PORTION of their retirement funds, and seem to doing just fine, thank you.
I just want to make sure my readers don't get all ethered up when they are making the decision.
The Franchise King
Joel Libava
Posted by: The Franchise King | March 20, 2009 at 08:37 AM
Joel, I agree that borrowing from the 401k (or any other retirement vehicle for that matter) is NOT a good idea. Simply put, you can borrow money for most anything else, but you can't borrow money to retire on!
BTW, I'm one of those mean old investment advisers who lost 30-40% in the market. But I only had 20% of my portfolio invested, since I was 80% in cash. I hate being painted with the same brush as all the other "passive reactive" folks!
Mike Mc.
Posted by: Mike McCormack | March 19, 2009 at 11:49 PM