Using Your Nest Egg To Fund Your Franchise

WASHINGTON, D.C. - If you are going to invest in a stock for your financial future, then what better to invest in than your own business, right? According to Steven Cooper, president of SDCooper Company and Karen Franklin, its CFO, there is a way to do just that by using your retirement funds to finance your new franchise and not incur tax penalties. Mr. Cooper and Ms. Franklin took a moment to speak about the subject while exhibiting at last week's International Franchise Expo. 

The solution to tapping into retirement funds is called an Entrepreneur Rollover Stock Ownership Plan (ERSOP). Retirement funds (e.g. 401k, IRA, 403b, etc.) can be rolled over into an Employee Stock Ownership Plan (ESOP) that is established for a new C-corporation company. The ESOP then buys the stock that will be used to fund your new franchise company.

Confused? An ESOP is a benefit plan that allows employees to buy stock in their own companies. Entrepreneurs who don't want to sell all of a company often will use ESOPs to sell part of their company for cash as they approach retirement age. When ERSOPs are used together with ESOPs, it allows an entrepreneur to fund a new company with their retirement funds by buying stock in them.

The process is completed when a franchise buyer exits his franchise investment way down the road. An exit strategy must be planned by  potential franchisee and one day executed in order for the ERSOP to be without penalties.

There is a danger though. You are taking from the relative safety of a more diversified retirement portfolio and investing it into a single risky start-up venture -- your venture. If your franchise goes belly-up, you lose your nest egg.  

The process is complex and skirts nebulous areas of IRS rulings so it is best to hire an appropriate business attorney or accountant to set up an ERSOP. According to SD Cooper, you need about $50,000 in eligible retirement funds to work with and the process can be successfully completed within two weeks.

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Mr. Blue MauMau interviewed SD Cooper Company's president, Mr. Steve Cooper and CFO, Karen Franklin at the 2006 International Franchise Expo. Click here to listen to a podcast of the interview.