Watch my new video on evaluating franchise opportunities.

On several occasions while I was the CEO of HomeVestors, and on on many occasions in the last 30 years while advising people who buy franchises, someone was buying a franchise using “Daddy’s money.”

Most of the time it wasn’t a good idea. Lots of times these deals occurred right about the time of college graduation. 

He doesn’t want to teach after all

“My son,” a dad told me not long ago in my office at HomeVestors, “is about to graduate from college and he doesn’t really want to be a teacher after all. I think real estate investing makes a lot of sense . . . [at least it did at the time] . . . and so we’re here to buy him a franchise.”

Dad just wanted to help his kid

While Daddy talked, I watched Son, and in this particular meeting, Son demonstrated all the signs of fear and disinterest. Clearly, this was Daddy’s idea and not Son’s. Quite often it happens that way. Dad (or Mom) wants Son or Daughter to achieve success and they are willing to invest money to “help” them.  

It happens the other way, too. It’s Son or Daughter who’s eager to buy a franchise, and they need their parent’s money. 

A trip abroad might be a better gift

My advice: Proceed with caution! Investing in a business may seem like the ultimate graduation gift for your child, but it may turn into a financial and family disaster.

Can I tell you of any success stories where a parent put up money for a son or daughter to buy a franchise?

Many kids do succeed in franchising

Absolutely. Lots of them! Especially of parent and child working together. It’s very common in franchising, and many companies can brag about these stories.

But no one talks about the failures . . . and there are many of them, too. No one talks about them because the deal was bad for the kid who lost money and probably self-esteem; bad for the franchisor who had to work through the issues related to a failing and ultimately failed franchise; and ugly for Daddy because he thought he was doing a good thing and instead lost his money and possibly alienated his child and other family members, too. 

Here’s how franchising works best

Franchising works best when the buyer/operator uses his or her own money, or at least shares responsibility for the money. It also works best when the operator really wants to be the operator and understands what that means. The kid who graduates from college and realizes he doesn’t want to teach after all, isn’t necessarily ready to run a franchise. At least it should be his or her idea!

7 steps that could help you and your kid

If you’re considering putting up money to buy a franchise for your child, here are 7 steps to consider:

1. Ask your child to sell you on why he or she should own and operate the franchise. What’s the motivation? How deep runs the desire? How great the commitment? I know it’s your kid, but be objective! What’s the chance of success? You don’t want your kid to fail any more than your kid wants to fail. 
2. Require a business plan, which you will approve. If running a business is your expertise, it’s okay to help your child create the business plan. Seek other assistance. Local colleges offer courses on creating business plans. Get your accountant involved.
3. Require a payback plan. Charge interest for your money. The Bank of Mom & Dad expects to be paid back. Require to see how you’re going to recover your investment, profitably.
4. Tell your child to go to work for a franchisee. It may be for only a week or three, but getting experience in a franchise unit could prove helpful. Your child may decide, “I don’t really like retail,” or “I don’t think I want to be in the food business,” or, “I didn’t realize how tiring it is to be in a truck most of the day.” This experience may at least help them decide the type of business they want to own and operate.
5. Request an endorsement from a franchisee. Tell your child, “Convince one of the existing franchisees that you’re the type of person who will succeed at this business and ask them to write you a letter of recommendation.” Make sure the franchisee has achieved success in the business! A franchise operated by a parent/child combo would be ideal for this assignment. 
6. Attend Discovery Day. The franchisor most likely conducts free orientations where prospects learn more about the franchise. Go along and participate in this experience. You and your child will learn the details related to operating the business and you’ll be able to assess the likelihood of your child succeeding at this business. It may be difficult, but you need to be especially objective now.
7. If you agree to make the investment, look after the business. Take a seat on your son’s or daughter’s advisory board. Monitor decisions and progress. 

Sound too much like being a parent?

If these ideas seem too restrictive for you or your child, think twice about what you’re doing! Because there’s a pretty good chance that if you don’t take these restrictive measures, this “gift” isn’t going to work out!   

You’re taking a greater risk when you put up the money for someone else to own and operate a business. So protect your money. More importantly: Protect your kid!

Watch This Video!

Also Read:

Whose Opinion Counts When You Interview Franchisees?

Photo image by: CarbonNYC

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.