401K TO FINANCE A FRANCHISE
Is a 401K Rollover a Good Idea to Finance a Franchise?
today we will explore using your 401K plan to fund your franchise and some of the benefits and drawbacks of doing so.
Firstly - what is a 401K Rollover and how can it help me buy my franchise? Well simply put you are taking money from your existing 401K plan and reinvesting that money into your own corporation or franchise. 401K plans vary widely in what they allow you to do so check yours to make sure your plan provides allowances for a rollover.
Now the major benefit that finance companies bring up first is the tax benefit - which is usually substantial. For example if you simply withdrew the funds from the 401 that money is subject to the tax amount of whatever state you live in. If you simply rollover that same amount into your new corporation you save those taxes. So in a simple scenario of a $200,000 franchise with a state tax of 20% that would be almost like the government funding $40,000 of your franchise in saves taxes.
Another benefit is the potential to draw a salary. With your new corporation in place you can personally draw a paycheck from day one - which can often lessen the pressure to achieve profitability when you first open your franchise. There may be additional tax benefits as well.
Some of the drawbacks of using your 401 for your franchise - firstly - that's your retirement money. Are you able to lose that money in the event of the business failing? No one likes to think of failure when you are embarking on your franchise but it does happen. Either lessen your investment amount to a tolerable amount to lose, or consider foregoing your investment. remember you don't have to spend hundreds of thousands on a franchise there are no shortage of great franchises for $50,000-$100,000.
Next - the cost to set up your 401K Rollover will be in the thousands of dollars and you will need a company to manage it for as long as you are operating. There will be an annual cost to do that.
Ultimately whether you should choose a 401K rollover, HELOC, unsecured credit line, savings or a blend of these franchise finance options will depend on your specific situation. We suggest speaking with a qualified finance professional early in the process to establish your best course of action before you even start looking at franchises. Franchise City works with dozens of finance professionals and along with our franchise services can assist you in locating a qualified finance company best suited to your needs.