Interview on Using Retirement Funds to Buy a Franchise

Submitted by Mr. Blue MauMau on Tue, 2006/06/06 - 22:20.

Mr. Blue MauMau interviews President Steven Cooper and CFO Karen Franklin of SDCooper Company about using retirement funds to fund a franchise without tax penalties. And it's all legal.

This interview is in mp3 audio format.

AttachmentSize
ERSOP Mixed.mp34.49 MB

Tags:

There are no tags.
»

Et tu MauMau?

Submitted by Paul Steinberg on Thu, 2007/09/06 - 15:42.

Using retirement funds to buy franchises and even buy your home is the latest rage. Basically, it is some variant on setting up a "company" and then buying "stock" in the company. So just as your retirement account can buy Exxon or Microsoft, it can buy "Mom's Pizza" stock.

Leaving aside the legalities (and I really don't think it is quite as settled a matter as Mr. MauMau would have us believe), the idea of putting all your retirement money in a business (franchised or otherwise) is incredibly risky. Apart from the obvious risk, having your retirement money sunk into the business can skew your decision-making.

I have a situation right now where there are 2 partners. The site is losing money every month, and one partner wants to sell and eat the current debt. The other partner cashed in her 401k and so she won't sell since it would mean confronting the fact that she will retire destitute. Very sad.

Please... if your credit is that bad and you can't find a lender to finance your franchise, wait a bit and try again. That "once in a lifetime" franchise opportunity will still be there.

Allow me to comment on this

Submitted by FuwaFuwaUsagi on Fri, 2007/09/14 - 21:53.

Allow me to comment on this as a financial professional:

This EXPOTATION of  a LOOPHOLE is ENTIRELY in contrast with the spirit and intention of the provisions of retirement law - period.  

And anyone suggesting this is appropriate is irresponsible - period.   If you have any doubt as to my words read the record that is attributed to the debates that eventually allowed people to "tap" their ROTH IRAs for first time home purchase.   William Roth jr (the Senator for whom the ROTH IRA is named) would roll over in his grave.  

FuwaFuwaUsagi

"Never underestimate the power of stupid people in large numbers."

It's all legal?

Submitted by RichardSolomon on Fri, 2008/01/04 - 14:59.

Did that opinion come from Jenkins & Gilchrist?--

Richard Solomon, FranchiseRemedies.com,  has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

YOUR KIDDING

Submitted by Guest on Tue, 2008/01/08 - 14:57.

Can anyone out there be that stupid to use the last of their life savings to jump into a gamble of any franchise.

ZORS are after retirement funds ---401's and 403's

Submitted by Guest on Thu, 2007/09/13 - 13:54.

If the IFA is successful in changing the laws to allow retirees to use and lose their retirement funds without the tax penalty in franchise investments, the government needs to regulate franchising as well as securities are regulated by the SEC.

If prospects invest in franchises with very high failure rates, that have not been disclosed under law, this is an ugly practice that becomes uglier when one's nest egg feathers somebody elses nest and leaves the ZEE destitute in middle age.

Franchisee prospects often think that by using their 401's or their 403's or their equity in their homes as a source of funds, they won't have debt to service in the beginning of their business and will have a head start toward breaking even while drawing a small pay check.

Exploitation of loophole

Submitted by Paul Steinberg on Fri, 2007/10/05 - 21:40.

Fuwa writes: EXPOTATION of  a LOOPHOLE is ENTIRELY in contrast with the spirit and intention of the provisions of retirement law - period.  

Not necessarily. One CPA's "loophole" is one IRS auditor's "sham transaction."

As I understand it, the concept is that you take your tax-sheltered funds and cash them in to buy a franchise. Since you can not (under current law) do this without penalty, you set up a company and then buy all of the "stock" in the company which just coincidentally happens to own a franchise which you just coincidentally happen to be the principal (if not the franchisee) of.

I take no position here on whether someone should be able to tap their retirement funds to buy a franchise. However, I do object to these intermediaries who act as though there is no potential for IRS action. People using this structure should proceed with their eyes open, and have a long talk with a qualified CPA, not their Cousin Louie The Accountant.

401k note

Submitted by Paul Steinberg on Fri, 2007/09/14 - 15:55.

Just to clarify--It is not the IFA that is promoting this, it is private companies. And there has been no change to the tax code, the companies claim that the existing laws permit you to cash in your 401(k) and use the proceeds to buy a franchise.

government intervention and home equity debt service

Submitted by Guest on Thu, 2007/12/20 - 21:45.

As the SEC regulates securities, the FTC regulates franchises. There was no "law change" to accommodate the franchise industry. The opportunity to fund a business in this manner falls under the ERISA statutes established in 1971, and the result of performing this act is no different than leaving the employment of UPS, for instance, with your 401k, and transferring that 401k into the value or stock fund of your next employer -- say, an energy or mortgage company -- that then tanks and takes everyone's funds with them down to $0.

A home equity line is a source of funds with a debt service to pay from day one. Anyone going into business is aware of that. A HELOC is not a free ride from debt service, and there are no funds available without collateralizing a loan with your own assets.

Though I don't necessarily support the idea, I've had lengthy and detailed conversations with people about it, and there are some compelling arguments for the use of such a "loophole" and its ability to give people options they'd otherwise not have. Say a 45-year-old with children has been through a divorce, and his career has been pink-slipped, decimating his net worth. If he's got $200K sitting in a retirement plan, he knows he'll never have enough in that fund to retire on, so he uses this money to start a business and leverage his experience, building a good income within 2-3 years, a great income within 3-5 years, and a significant income while sitting atop a high-worth, sellable asset of a business within 7-10 years. That actually happens.

The greatest proliferation of failures in the franchise world, whether the franchisor is exceptional or terrible, come from 1) buyers who visit a store at its peak hour and believe that it's always that way, 2) buyers who fill in factual gaps with information from both old and new media, and 3) buyers who purchase based upon their reigning assumptions. Most franchise prospects gain their "information" during due diligence from the most ridiculous and uninformed sources, including their own experiences in both related and unrelated industries; the concept of critical thought has left the building with Elvis.

With a proper coach and a proper approach, the junk franchises can be quickly eliminated, and the strong and fitting franchise and financing options can be effectively judged against a buyer's strengths, weaknesses, and concerns.

don't say that...

Submitted by FuwaFuwaUsagi on Thu, 2007/12/20 - 23:56.

It was written:

If he's got $200K sitting in a retirement plan, he knows he'll never have enough in that fund to retire on

My reply:

What on earth are you talking about?  

This truly bothers me.   It encourages people to reinforce their plebian understanding of finance that results in poor decision making. 

Without dong anything unusual you could reasonably expect that 200K to be worth approximately 1.6 Million in twenty years.  Adjusted for probable inflation and a safe withdrawal rate, indexed to inflation, of about 26k (present value) a year during retirement.   Add in Social Security benefits and you are probably looking at about 40k a year in today’s dollars.

Using a more advanced investment approach using asset allocation and annual rebalance and you would expect the portfolio to be worth approximately 3.3 Million allowing you to safely withdraw about 53k a year in today’s dollars or with Social Security 67k.

Whether those numbers are reasonable for retirement or not depends on many factors.   However I suspect, given that I presented them in present value I think most could retire on 40-67k a year adjusted for inflation.    This is very different than the dire pronouncement made earlier. 

Moreover, by opening a franchise you are subject to business specific risk.  The two models I used subject you to either systematic risk or a risk factor that is approximately 12% less than the systemic equivalent(this is accomplished by introducing REITs and commodities into the portfolio which react differently during periods of systemic business unrest.  What this means is you have much greater chance of reaching the numbers I posted than you do in having equivalent success in a franchise.

FuwaFuwaUsagi

"Never underestimate the power of stupid people in large numbers."

Eliminating Junk Franchises

Submitted by michael webster on Fri, 2007/12/21 - 06:08.

Guest wrote: "With a proper coach and a proper approach, the junk franchises can be quickly eliminated"

Why don't you tell us how you go about in general eliminating junk franchises? 

Michael Webster PhD LLB

Franchise News

What on earth are "YOU" talking about

Submitted by Guest on Fri, 2008/01/04 - 14:53.

Hey FuwaFuwaUsagi....by the way, is that a real name? Sometimes, like me, you want to place your trust in your abilities and put your balls on the line to start your own business.

If it requires taking advantage of new tax law loop holes, then so-be-it. That is the point that I'm at after saving and scrimping for years. I think that investing in myself is far better than keeping money in my IRA and leaving it to the whims of the stock market.

Your opinions are valid....just don't preach!

R.A.S.

"The definition of insanity, is doing the same things over and over again...but expecting different results".

Alo? Salut! Sunt eu, un haiduc...

Submitted by FuwaFuwaUsagi on Fri, 2008/01/04 - 23:16.

It was written:

I think that investing in myself 

My reply:

You can utilize the search function and locate my article on "What is an investment". 

I do not know the opportunity that you are considering nor your background.   However I suspect, based on what you have written, that you are entertaining more of a gamble than an investment.

It was written:

If it requires taking advantage of new tax law loop holes, then so-be-it.

My reply: 

When you take advantage of a loop hole that disregards the documented spirit and intention of a law you have crossed a moral and ethical boundary.  

Such transgressions reflect directly on your character.

It was written:

Your opinions are valid....just don't preach!

My reply:

I fail to see the error in evangelizing financial acumen. 

FuwaFuwaUsagi 

Fill your boots

Submitted by Guest on Fri, 2008/01/04 - 18:15.

"There are only two kinds of people, those who accept dogmas and know it, and those who accept dogmas and don't know it."

"Fallacies do not cease to be fallacies because they become fashions."

"To be clever enough to get all the money, one must be stupid enough to want it."

G.K. Chesterton

Arm your mind...

Submitted by Truth in Franchising on Fri, 2008/01/04 - 18:56.

"Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.""

"It is better to be feared than loved, if you cannot be both."

"One who deceives will always find those who allow themselves to be deceived. "

Nicolo Machiavelli

The Truth Shall Set You Free!

TIF

Deceit & Virtue

Submitted by Guest on Sat, 2008/01/05 - 01:27.

A man who wants to act virtuously in every way necessarily comes to grief among so many who are not virtuous.

And if, to be sure, sometimes you need to conceal a fact with words, do it in such a way that it does not become known, or, if it does become known, that you have a ready and quick defense.

In general, men are ungrateful and fickle, dissemblers, avoiders of danger and greedy of gain.

Machiavelli

- 30 -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
    Syndicate content