Are You Overlooking the Option of Self-Directed 401K to Finance Your Franchise?

Share Button

Seagraves-1 Headshot

The employment landscape has changed dramatically in recent years; the concept of a corporate job for life, with a healthy pension, is dying out.

A growing number of Americans are turning to entrepreneurship, often midway through their careers, to reach their income needs and retirement dreams.

Most of the people I talk to don’t want to go into debt to finance their entrepreneurial venture; they’re not interested in re-mortgaging the house or other personal assets. They’re often surprised, and delighted, to learn about “rolling over” their retirement dollars to invest in their new business, whether you have an IRA, 401k (the most common), SEP, SIMPLE, 403b, 457 or other eligible plan.

The government calls it ROBS – Rollover for Business Startup; the strategy is also known as a Self-Directed 401K. It’s a great way to minimize risk, by eliminating or reducing debt servicing that would negatively impact their cash flow.

The Magic of Pre-Tax Investing 

When you use a Self-Directed 401k to invest in your business, you are investing your pre-tax dollars. You’re not borrowing it; you’re not withdrawing it. Think of it this way: when you began contributing to the 401k you have currently, you were likely investing in your employer’s stock, giving you company shares in return for your cash. It’s the same concept when you invest in your own small business with a Self-Directed 401k.

Your retirement plan (your self-directed 401k) invests in the stock of your small business. Your company gets the money from the sale of its stock, and then has the capital required to start—or expand—its business.

Some of the benefits of Self-Directed 401k for funding your new business include:

You Can Approve Yourself  

You can skip the embarrassment of groveling in front of your banker for a loan; you effectively approve the newly incorporated company of You, Inc.

No Debt, Taxes or Penalties  

With no interest to pay and no time schedule to repay for retirement funds, your business thrives with improved cash flow.

Minimal Paperwork 

Setting up a Self-Directed 401k plan requires far less paperwork than a loan application, and there is no business plan required to get your funding.

Get Funding Fast

On average, it takes about three weeks for entrepreneurs to receive their money from the rollover of their current retirement plan and the purchase of their company stock.

Cover Business Expenses

You can use the money for salaries, equipment, inventory purchases or any other legitimate business expenses, including a down payment for another loan.

Multi-Unit Franchising Made Possible with Self-Directed 401k

Max Steiner, of Little Rock, AK, took early retirement after working three decades for a private mining company, and with his kids away at college and his wife working part-time, Steiner discovered he had lots of free time – and that didn’t suit him, personally or financially in the long-term.

But Max wasn’t looking for another full-time job; he was looking for a business investment. And when it came to his retirement dollars, Max knew it wasn’t realistic to rely on the stock market to grow any real financial security.

He was attracted to franchising because he felt that the proven business plan that comes with the purchase of a franchise would require less involvement on his part. Working with a franchise consultant, Max narrowed it down to Sola Salon Studios, whose business model is to lease salon space to individual hairdressers. Max realized he could play landlord and he’d just collect checks each month – no employees, no inventory, and no need to be there every day. Perfect for his lifestyle.

Then came the issue of upfront capital. “The investment [in the multi-unit franchise] was considerably more than I was prepared for,” Max admitted. “I probably could’ve gotten a loan, but it’s not what I wanted at this stage of my life. I didn’t want to get tied down to a huge commitment that way.”

When Max worked with me and the rest of the CatchFire Funding team, we suggested he take a look at rolling over his 401k. We advised Max that many entrepreneurs see substantial return on investment with the Self-Directed 401k, 25% or more – pretty great when compared to investing in Wall Street where you might get 6 to 8% ROI.

While multi-unit franchising isn’t for everyone, it’s a great way to build a portfolio. You are effectively buying options on units two through five; costs are really only for the first unit. Once that unit is profitable, it’s easier to get bank loans for the rest of the units. Any loans will be covered by your cash flow from first two units.

Max went the route of Self-Directed 401k, and opened his first Sola Salon Studios franchise in Little Rock in February of 2014. A year later, he’s on track to open his second location of the franchise, with plans for a third.

Franchising financed with Self-Directed 401K – a great marriage for fast, effective investment!

William R. Seagraves, president, CatchFire Funding, of Parker, CO, is the author of the Penguin Random House book, ​Be Your Best Boss: Reinvent from Employee to Entrepreneur, released in February 2016.Learn more at yourbestboss.com.