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Guidant Pulls Out of Small Business Financing

IRS Building, Constitution Ave., D.C. Photo/U.S. govt

BELLEVUE, Wash. (Blue MauMau) – Guidant Financial Group, the largest company in the relatively new industry of rolling over retirement funds to finance small businesses, is suspending its small business financing unit for fear of running afoul of the IRS. The decision was made last Friday.

Financial consultants claim that individuals can roll over their  retirement funds, such as 401k's or IRA's, to fund new franchise or business startups without incurring taxes or early withdrawal penalties. Guidant was one of a dozen or so firms who worked with franchise and small business buyers to attain funding from their retirement funds.

The first evidence that tipped off the franchise industry that something was critically wrong was when Guidant's booth at the annual International Franchise Association's convention held over the long President's Day weekend in San Diego was noticeably vacant. In this environment of a grim economy and the closing of financial institutions, franchisors were abuzz with speculation on the darkened exhibition booth and what it might mean to the industry.

David Nilssen, cofounder of Guidant Financial. Photo/Guidant

A growing and significant number of small business buyers fund their startups by rolling over their retirement funds. With ever tightening access to credit, small- and medium-size franchisors count on a buyers' ability to use their 401k and IRAs.

Explains Guidant cofounder and executive vice president David Nilssen, “Guidant didn't show up [at the IFA Convention] because we have indefinitely suspended our small business financing unit. Guidant received information over the past couple weeks that there is increasing concern about the way promoters are selling and marketing the 401k rollover product. So we have decided to stop promoting that product until we can get further clarity from the regulatory agency.”

On the nature of the IRS ruling, he said, “The IRS essentially provided guidelines to auditing field examiners, such as where operational defects can be identified. In some ways, they showed that this product is compliant. But there are many ways in which the owners of this product could have potential operational issues."

Nilssen was the CEO until one week ago, when the firm announced that Stephan Roche would replace him as the new CEO. Nilssen explains, “Steve Roche is still with us. The company is not a one-product shop. The company will continue to survive. We have a strategy for growth that we are currently working on that is outside of just small business financing. We tend to do a lot of business with the nontraditional investment world. That's where we started. There will be consolidation for us, since this product is a big part of what Guidant is and how we've grown to be the largest provider in this industry."

Karen Franklin, vice-president and CFO of competitor SDCooper Company, speculates that what Guidant most likely is talking about is its practice of paying commissions to franchise brokers and sellers for financing. She states, “The problem with Guidant is that they are probably paying a commission to a referral source. That is specifically not allowed.”

Franklin observes that in contrast to Guidant, “SDCooper have from the get-go always been letter of the law in doing things correctly. We are business as usual.”

Guidant's new CEO Stephan Roche replies to such speculation, "I understand there is a rumor that we did not follow the guidelines, but that is 100 percent not the case. Our statement to our partners shows that it is our belief that our product is not only compliant, but that we are one of the most conservative firms in the industry." As proof of this, Roche declares, "Only one of our clients has been audited by the IRS, and that audit passed clean." 

But the Internal Revenue Service's October 2008 memo, Guidelines regarding rollovers as business start-ups (pdf, 15 pgs), indicates that the agency is casting a generally skeptical eye on such rollover plans. An IRS field guide instructs that these rollover plans “appear to operate primarily to transact in employer stock, resulting in the avoidance of taxes otherwise applicable to distributions from tax-deferred accumulation accounts.” It questions the valuations given the startup business schemes.

Guidant laid off a significant number of employees on Monday. Roche does not want to be specific on the layoffs, but he states, "There haven't been any official releases of the number, but it is below 40." He mentions that it was necessary to bring down expenses to the revised expectations of revenue. A little more than half of the staff remain. Roche observes, "It is devastating to us that the IRS and the DoL have put us in this position through the way they have handled this situation overall. We had to lay off a group of extremely capable employees at a time when obviously it is a terrible market to put them in to support their families. It was an extremely difficult decision. If we are able to resume sales, we know exactly where to go to find the best employees in the industry."

The firm notified its partners in an email on Tuesday that it was pulling out of small business and franchise financing.


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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email