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

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.