How You Can Leverage Your 401(K) to Buy a Franchise

How can you use a Rollover for Business Startups plan to find a franchise? There are five simple steps, explained in this article.

5 Steps to Use a Rollover for Business Startups

We’re often asked whether you can you use a rollover for business startups to finance a franchise purchase. The answer is yes, and in this article you’ll learn how.

Financing your franchise

One of the ways to improve the return on an investment is to leverage – use other people’s money to profit. You may have considered borrowing to invest in a franchise. Many franchise buyers and small business owners do.

However, borrowing to buy a business means that you are reliant on business profits outpacing the interest you pay on a loan. Average interest rates for startup businesses are generally higher than other business loans. 

According to research published by NAV, the rate of interest you pay on a loan to set up your business can be as high as 100%. Paying this much will decimate your net return. 

Fortunately, there are financing strategies in place that mean you don’t need to borrow money and pay extortionate rates of interest to lenders. One of these is by leveraging your 401(K) using a Rollover for Business Startups arrangement.

What is a Rollover for Business Startups plan?

A Rollover for Business Startups (or ROBS) allows you to use your retirement funds to pay for the costs of starting a new business. 

In simple terms, using a ROBS scheme, you can access your retirement savings early. If you have been putting money into your 401(K) since starting in the world of work, the chances are that you have amassed quite a pot of funds by the time you have hit your late 30s and into your 40s and 50s.

By using a ROBS, you may be able to start your business debt free. With no interest to pay, this could make a huge difference to your profits.

The advantages of using a ROBS

I’ll be looking in more detail at the advantages and disadvantages of using ROBS to buy a franchise in a future article. For now, here’s a summary of the benefits of ROBS schemes:

  • You’re in control – your return isn’t determined by the manager of stock market fund. You are in charge of your own destiny.

  • No debt when you start your business – meaning you keep more of the profit to do with as you please.

  • No collateral at risk – there is no collateral to put up to secure a loan. Your home is not at risk.

  • Profits flow faster – with no loan repayments to make, your business is well placed to reach profitability faster.

  • You can still save into your 401(K).

  • Tax-efficient – when using ROBS, you won’t pay a tax penalty for early withdrawal of retirement funds.

(If you don’t want to wait until I publish my article detailing the pros and cons of an ROBS 401(K) for franchise buyers, don’t hesitate to contact me to learn more.)

How do ROBS plans work?

The attraction of a ROBS is easy to understand. No loan repayments, control over your money, a faster route to profitability, and you keep more of the profits to do with as you wish.

The question now is, how do ROBS work? Here’s a 5-step guide:

Step 1: Create a new C-corporation

Establish your business as a C-Corporation to enable the sale of Qualified Employer Securities (QES).

Step 2: Set up a 401(K) for your new business

And choose a custodian to manage it.

Step 3: Execute the rollover

You’ll need to use an attorney or ROBS provider to rollover your original 401(K) into your new scheme.

Step 4: Your 401(K) buys stock in the C-corporation 

This purchase is made via a QES transaction (hence step 1 above).

Step 5: The funds are now available to finance your franchise purchase

The C-corporation can use the funds to finance the franchise, to pay franchise fees, the cost of buying equipment, startup costs, and hiring employees – with no interest to pay.

Should you use a ROBS to finance your franchise?

Using a ROBS to finance your franchise purchase is an attractive proposition. Your business has important startup financing, pays no interest on it, and should reach profitability sooner. There are tax advantages not available otherwise, and you won’t need to put collateral at risk.

However, before you rush to use your 401(K) by executing a ROBS scheme, you should seek personalized advice that examines your unique financial and personal circumstances. Franchisees who partner with experienced people and seek advice are those who avoid the common mistakes that could sink a business venture before it has the chance to get off the ground.

To learn more, and for the advice that will accelerate your success as a new franchisee, take advantage of a free consultation with New Ground Consulting.

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