Got Retirement Money? Then You’ve Got Money To Invest In A Franchise

An unpublicized tax law is helping thousands of people buy franchises

Leonard I. Fischer, Esq.

If you’ve got a retirement fund, and even if you’ve been told you can’t use the money to invest in a business, you’re just four steps away from funding your own franchise acquisition.

Across the USA, entrepreneurs are turning their 401(k)s and other tax-deferred accounts into capital to invest in a franchise business. They’re being helped by a cottage industry pioneered nearly 20 years ago by Leonard I. Fischer, an attorney who founded BeneTrends, Inc., and serves today as its CEO.

“I get the credit, or the blame, for popularizing this concept in the franchise community,” Len told me recently when we chatted during the International Franchise Expo in Washington, DC, where BeneTrends was an exhibitor. “About 85 percent of our business is helping people use their retirement funds to buy franchises.”

BeneTrends calls it the Rainmaker Plan and Len estimates that his firm has helped up to 7,500 investors in the last 17 years; the majority of them in the last five years.

Concept growing by leaps and bounds

“Business is very good,” Len continued. “We’re already 50 percent ahead of last year’s numbers. We’re growing by leaps and bounds.”

What is this Rainmaker Plan anyway, and how does it work?

Oddly enough, an unpublicized tax law allows individuals to invest their retirement funds in a business without penalties, but there are four steps to the process, which must be closely followed to avoid objection by the IRS.

The steps, which BeneTrends handles for its clients, are:

1. Set up a corporation.
2.  The corporation establishes a retirement fund.
3.  You roll over your prior retirement plan or IRA into the new retirement plan.
4.  The corporation directs that the funds be invested in your own company (franchise) stock.

The key here is that you are investing your retirement money and not withdrawing it. The latter would trigger penalties.

BeneTrends, based just outside of Philadelphia, Pa., also takes care of establishing your corporate bylaws, paying filing fees, and issuing appropriate stock certificates.

What’s this service cost?

What does Benetrends get out of the transaction? A $4,995 one-time fee. “It’s tax deductible,” Len pointed out. The client is also eligible for a $1,500 tax credit spread over three years.

Of course, not everyone thinks this is a good idea!

A Dec. 22, 2008 BusinessWeek article quoted Alice Bredin, a small-business consultant with American Express, who said it “is a really bad idea” to utilize retirement funds.

As you’d expect, Len said, “I disagree! Obviously American Express wants you to keep your money in the stock market, but it’s my opinion that you’re better off setting up a corporation and investing in your own business. That’s more sensible.” Providing, of course, that you do your homework before investing in a franchise.

Plan not a favorite of the IRS

The IRS, according to Len, also isn’t thrilled about this service. “The IRS doesn’t like our plan, but we’re basically doing what the Obama administration wants us to do. We’re rebuilding our economy, creating jobs, investing in businesses, creating retirement plans and helping to grow the economy. Do it right, follow the rules, and the IRS has to approve these plans.”

If you’ve been shopping for a franchise, your plans may have been delayed for lack of funding. Small-business loans from traditional lenders had fallen 30 percent by the time of the BusinessWeek article, and probably more by now. “If your only capital is in your retirement fund, and you want to start your own business and build the American Dream, the Rainmaker Plan may be your ticket,” said Len.

But don’t get carried away! Investigate before you invest. Franchising is not for everyone . . . do your homework, choose carefully, and then take advantage of the Rainmaker Plan, or similar plans available today.

U.S. Government Says 97% Of Franchises Succeed. True Or False?

During the recent International Franchise Expo in Washington, DC, one of my students asked me if it was true that the U.S. Department of Commerce determined that franchises succeed 97% of the time.

“Where’d you’d see that information?” I asked.

Don’t Believe Everything You Read Online

The student said, “I found it on the Internet.”

That’s what I figured she’d say because I’ve read it on the Internet, too. And before we go any further, let me tell you that it’s a lie.

And it wasn’t perpetrated by the U.S. Government.

So how did this story get started — because it’s in more than one place on the Internet, and more than the occasional franchise seminar leader uses it, too.

Here Are The Facts

The fact is the U.S. Government did conduct studies on the longevity of franchises in the 1970s and 1980s. A long, long time ago!

The fact is the government didn’t study the “success” rate of franchises. The government studied the “survival” rate of franchises. And year after year, the government’s leading franchise expert, the late Andrew Kostecka, reported that 97% of franchise licenses “survived” from year to year.

In other words, a franchise license that existed in 1980 still existed in 1981.

Longevity Doesn’t Necessarily Mean Success

Mr. Kostecka always pointed out, however, that “survival” did not necessarily equate to “success.” He and I discussed his studies on many occasions and it was always noted that a franchisee could be in bankruptcy, but the franchise license would still be intact and therefore part of the 97%.

Through the years, overly ambitious franchise sales people substituted the word “success” for the word “survive” in Mr. Kostecka’s findings, and voila!, they had quite an attractive testimonial for buying a franchise.

But don’t you believe it!

It may still be true today that 97% of franchise licenses survive from year to year, but . . . so what?

97% Success Still Isn’t Good Enough

It’s not important. Which may be the reason that no one has repeated that study since the late 1980s. That and the fact that the government hasn’t demonstrated all that much interest in studying any aspect of franchising. That’s not a jab or a complaint–it’s probably just as well that the government spends its money elsewhere.

In every seminar that I teach, the “survival vs. success” issue always comes up and I’ll tell you what I tell my students. Even if I could tell you that 97% of franchises succeed, it wouldn’t be good enough for the person who bought one of the franchises that fell into the 3%!

Don’t worry about generalized, across the board statistics in franchising. First, when it comes to success they don’t exist, and second, they would not be relevant.

Here’s what matters: What’s the rate of success for the franchise that you want to buy?

Now that’s worth knowing!

Continue watching this blog and I’ll tell you how you can get that information.

Image by Big Mike NYC

Of Course You Can’t Sell The Franchise To Just Anyone. Here’s Why!

I don’t remember (and it doesn’t matter) which major news publication this week ran an article about the popularity of franchises in a recession, but there was one sentence in the article that gave me a chuckle. Often times, when the media print articles that put a positive spin on franchising, they include a zinger to caution people. And that’s okay, because franchising isn’t for everyone, and it’s not a guaranteed path to success. But sometimes these zingers are obvious.

Like this one: “Often (franchise) agreements are written so you can’t even sell the franchise operation without the approval from the franchise company.”

Well, duh!

That’s a good thing, isn’t it?

Who Do You Want To Sell To?

You’re a franchisee, you operate your business for a dozen years, you make some money and decide–for whatever reason–that you’re going to sell the business. Does it make sense for you to sell the business to just anyone?

It would be in the best interest of everyone, including the other franchisees, the new franchisee who is buying your business, and. of course, the franchisor, to sell the business to someone who qualifies!

The franchisor and the other franchisees want to be sure that the new operator will be a quality individual who not only can afford the business but understands what it will take to succeed. The buying franchisee also wants to know that he or she has the confidence of the franchisor and the other franchisees in the network.

And hey, if you’re selling the business and expecting a payout over time, you want to be sure you’re getting a qualified candidate and not someone who will run the business into the ground in a few months and never pay you! The franchisor will help you determine if your candidate is qualified.

This just makes sense, doesn’t it?

Why Call Attention To This?

So why run this flag up the pole to call attention to what is perceived to be the downside of franchising? It’s not!

And I don’t think there’s any “often” about it. I don’t know of any franchise agreement that says a franchisee can sell the business to anyone without the franchisor’s approval. In fact, I’d be afraid to buy into a network like that. Wouldn’t you?

Franchisees As Risk Takers? Think Again.

Years ago when I interviewed franchisees for Franchising: The Inside Story (published so long ago, I’m embarrassed to say, that it’s out of print!) I always asked them how they felt about taking risks. At the time, I thought franchisees were entrepreneurs and that entrepreneurs were risk takers.

But I got an education!

Franchisees may be (and they may think of themselves as) entrepreneurs, but they do not see themselves as risk takers. 

That’s why they buy franchises!

The risk taker is the man or woman who puts everything on the line with little or no assurance of a safety net. It’s do or die!

“Isn’t that true for franchisees, too?” you may be asking.

To a degree, yes. But it doesn’t have to be, and for most it’s not the case. Most franchisees do not put it all on the line with little or no assurance of a safety net.

“I am a calculated risk taker,” one prominent franchisee told me. “You can’t be in business without taking some risk, it’s just the nature of business ownership. However, you don’t have to be stupid about it, either. Or throw caution to the wind. You’ve got to realize that there’s a downside to any business opportunity. So you invest cautiously. You do your homework, and franchising gives you that opportunity. You look around the corner, you think through the pros and cons, and you spend time talking to others who already own a franchise. You can’t always do that when you’re starting a business that isn’t franchised. . . . So, no, I’m not a risk taker. But I do take calculated risks as a franchisee.”

Makes sense to me and perhaps it does to you, too. Let me know what you think.

Meanwhile, here’s a different take on risk taking. The real risk takers today are the people with jobs! They never know when the boss will show up and say, “This is your last day as an employee” and show them the door. Happens every day, doesn’t it? And those folks, who are already out on a limb because they rely on that paycheck, feel the fall when it occurs.

In times like this, we’re thankful to be entrepreneurial and most grateful for franchising! 

. . . Here’s something I just discovered. It may be out of print, but Franchising: The Inside Story is being sold among the used books on Amazon.com. You can get a copy for less than $2! However, you should be aware that while much of the info is as good today as it was in the early 80s when I wrote it, much of it is also out-of-date!

Buy A Franchise And Learn What NOT To Do

I’ve often said that you buy a franchise to learn what TO do, but franchise veteran Jim Tatem, speaking at the International Franchise Expo in Washington, DC, put another spin on things when he said, “You buy a franchise to learn what NOT to do.”

Excellent point.

And it reminded me of a cousin in Ohio who opened a pizza shop many years ago only to lose her investment because she didn’t know what NOT to do. She knew how to make a great pizza pie! And everyone loved her pizza. So what happened?

Unfortunately, she didn’t know NOT to advertise in the local newspaper to attract customers to her pizza shop. She invested heavily in the Sunday newspaper because it had the highest circulation and good readership. There’s nothing wrong with buying newspaper advertising, but that’s not the way to build repeat customers for a pizza shop. Most of the people who read the newspaper didn’t read my cousin’s ad, and most of those who did were too far away from the shop to patronize it, even if it was the world’s greatest pizza pie. 

There are much more effective ways to bring customers into a pizza shop and keep them coming back, but my cousin, unfortunately, did NOT know that. Had she invested in a pizza franchise she would have learned what NOT to do, along with what TO do. In her case, knowing what NOT to do would have saved her business.

Want to build a satisfying and profitable business? Franchising may be the right choice for you. A good franchisor will teach you what TO do as well as what NOT to do. 

John P. Hayes, Ph.D., author and speaker, has written the Franchise Pre-Investment Checklist to help you thoroughly research franchise opportunities. A 30-year franchise veteran who has owned franchises and was the CEO of a major franchise company, John is perfectly suited to help you with your franchise decisions. He offers a variety of free reports, teleconferences and seminars to help you decide if you should buy a franchise and if so, which franchise to buy. Subscribe to his free newsletter athttp://www.howtobuyafranchise.com

9 Reasons To Buy A Franchise Now

People often ask me, “Why should I buy a franchise?” and I’m often too quick to respond, “You probably shouldn’t.”

They think my response is sarcastic or rude, when in fact it’s just honest. Even though franchising is the safest way for people to start their own business–it’s successful, it’s exciting and it has led tens of thousands of people to the American Dream–most people should not buy a franchise. Franchising is not for everyone. It’s definitely not for most people.

That said, I think there are many good reasons why people should buy a franchise, especially now. Building a business is difficult in the best of times. In a recession, you’ll likely need the expertise of people who have succeeded before you. Therefore, you can rely on a successful franchisor to help you build a thriving business. However, only you can decide if it makes sense for you to buy a franchise. Here are 9 good reasons that may help you decide:

9 Reasons For Buying A Franchise

1. A recognized name and logo. In a recession, it helps if your prospective customers already know who you are and what you sell! That’s not always the case, of course. It’s one thing to buy a McDonald’s or Midas franchise – highly recognized name brands and logos. It’s quite another thing to buy a new franchise that has only a few outlets. That’s not to say that there’s anything wrong with buying into a new franchise. Even McDonald’s and Midas started with one franchise!
2. A proven operating system. Someone has figured out how to run the business successfully, that is, profitably and in a fashion that the owner/operator finds satisfying. There’s tremendous value in not having to re-invent the wheel, especially when you don’t have extra capital to spend. The lack of a system, in fact, is the major reason new businesses fail. What you’re really buying with a franchise is a proven system. You just need to be sure that it’s in fact proven!
3. Marketing and sales systems. Every business sells something, whether it’s a product or service. Often times, people are good at making the product or delivering the service, but they’re not good at marketing and sales. Good franchises solve that problem for the franchisees. Once again, you just need to be sure the systems have been tested and are proven to work successfully.
4. Capital investment that may be less than starting a similar business independently. By the time you come up with an idea, test it, develop operating-marketing-sales systems, hire people, find a location, source equipment, etc. you can save yourself a lot of time and trouble by investing in a franchise. It’s not always true. Sometimes you can start the business independently for less money, but what do you have? The brand you didn’t buy is now your competition. How well can you compete?
5. Financial assistance. Again, this isn’t always true. And with today’s credit crunch, it may be less of a factor. However, some franchisors do loan money to franchisees. Plus, lending and leasing institutions are often more inclined to loan money to a franchisee than to someone who’s starting a similar business independently. Why? Because franchising has proven to be a safer way to start a business. Lenders like proven concepts!
6. Training and Support. The franchise fee that you pay enables the franchisor to provide initial training and some initial support. Ask yourself this question: “How valuable is it to have someone teach me how to operate this business successfully? And to have them hold my hand, answer my questions, and guide me through the start up?” If the franchisor’s training is effective, it alone is probably worth far more than the franchise fee.
7. Ongoing Training and Support. The franchisor will continue to provide training and support to you for as long as you are a franchisee. As a business grows there are often new challenges that arise. The franchisor’s training and support saves you, as a franchisee, from having to go out and learn how to respond successfully to those challenges.
8. Research & Development. You don’t have to be as concerned about the development of new products and services as does an independent business owner. Part of your franchisor’s responsibility is to look down the road to the future development of the business and to create or acquire appropriate new products and services, and teach the franchisees how to market and sell those new products and services. There’s tremendous value in this advantage alone.
9. You are one of many. There are benefits to belonging to a network of like-minded individuals and business owners. In general, people like to belong. There’s comfort in knowing that others are engaged in building the same business and they are friendly towards you. They’ll help you if you ask them. Perhaps the greatest benefit today is cost-savings. If you’re one of ten franchisees in a market, your advertising costs may be 1/10th of what your non-franchise competitors have to pay. Plus, you will be able to buy products and services from suppliers for less money because there are more of you buying those products and services. Vendors like selling to franchisees, even at a discount.

If franchising makes sense for you, it may be your ticket to the American Dream. But only you can make the decision. Start by doing your homework. Then select a franchisor that provides at least these 9 good reasons and more to join them!

John P. Hayes, Ph.D., author and speaker, has written the Franchise Pre-Investment Checklist to help you thoroughly research franchise opportunities. A 30-year franchise veteran who has owned franchises and was the CEO of a major franchise company, John is perfectly suited to help you with your franchise decisions. He offers a variety of free reports, teleconferences and seminars to help you decide if you should buy a franchise and if so, which franchise to buy. Subscribe to his free newsletter at http://www.howtobuyafranchise.com