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Franchise Financing: Will a ROBS Plan Work for You?

By FranChoice Blog | Feb 13, 2019

ROBS plan

Looking at franchise financing options? If you have $50,000 or more in a 401(k), traditional IRA, or other tax-advantaged retirement fund, you may want to consider a ROBS (Rollovers as Business Startups) plan. A ROBS plan enables you to use money in your retirement account to fund your business without having to borrow against your account or cash it out.

Usually, if you take money out of a retirement account before age 59 1/2, you’ll need to pay income tax and a 10 percent penalty for the money you withdraw. Borrowing against a 401(k) requires repayment with interest. However, a ROBS plan is different and triggers neither a penalty nor repayment with interest. A ROBS plan is actually a rollover that invests directly in your business.

How a ROBS Plan Works

The mechanics of setting up a ROBS plan can be confusing. Consulting a qualified professional is essential. Here’s a simplified description of the steps involved:

  • Form a C Corporation
  • Establish a retirement plan for yourself and eligible employees. It can be either a profit-sharing or 401(k) plan.
  • Transfer funds from your old retirement account into the new retirement account.
  • Sell stock in your C corporation to the new retirement plan.
  • Use the proceeds from that stock sale to start or grow your business.

A ROBS plan isn’t for everyone, but it can offer a flexible, debt-free option under the right conditions. As with any business start-up, there are risks involved.

Advantages of a ROBS Plan

Here are some benefits:

  • No debt or interest. Launching your business without debt or interest to pay back is a huge win. You can reinvest any profits back into the business without debt eroding your cash flow.
  • No credit check. Most business loans take your credit history into consideration, but since a ROBS transaction is not a loan, you don’t have to worry about a credit check. Unlike borrowing options, a ROBS plan won’t affect your personal credit record.
  • Control of your retirement funds. Instead of having your retirement money sit with a brokerage house, you’re actually investing the funds in your business. Your savings will grow or decrease based on your business’s performance rather than an investment manager’s decisions or the whims of the market.
  • No early withdrawal penalties. A ROBS isn’t a distribution of retirement funds, so you won’t need to pay an IRS penalty.

Disdvantages of a ROBS Plan

Here are some drawbacks:

  • Retirement savings at risk. If your business fails, you will lose your retirement savings. (On the other hand, if you’ve borrowed money rather than using a ROBS and your business fails, you’ll have existing debt to pay back.)
  • Increased chance of audit. A ROBS plan poses a slightly increased risk of an audit by the IRS or Department of Labor.
  • Relatively slow to complete. The ROBS process can take 2 to 3 weeks, while a quick business loan can go through in as little as 24 hours.

A ROBS is a very specialized financing tool. As with any business decision, you should weigh the pros and cons with your individual circumstances in mind, and use a reputable provider to set up and manage your transaction. A FranChoice consultant can recommend trusted providers.

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Franchise Trends to Watch

By FranChoice Blog | Jan 30, 2019

franchise trends

Keeping an eye on franchise trends can be helpful when you’re deciding on a company to buy into. And it can assist you in the way you manage your business once it’s up and running. Here are a few franchise trends to watch.

Multi-Unit Ownership

In recent years, the number of franchise owners who own more than one location has grown tremendously. There are many reasons why this can be a great way to create wealth. For retail businesses, the path to growth is through more locations. And franchisees who diversify through a variety of locations may be better positioned to withstand changes in the economy.

Increased Access to Financing

While the 2008 downturn brought many years of lending backlash, a recent franchise trend is the rebound in credit availability. Prospective franchisees are seeing an increase in the ease of and options for obtaining financing for the purchase of their business. In addition, less paperwork may be required.

Mobile Businesses

An increasing number of franchises are providing mobile access to their goods and services. This usually means that the franchisee brings its services directly to the customer’s home or business, primarily operating by car or van without a brick and mortar or storefront location. This franchise trend enables companies to have a wider reach with lower overhead.

Online Tools and Social Media

Digital marketing is a necessity for today’s franchise owners. Online searches and web-based interactions are continuing to increase. These tools make it easier and more convenient for consumers to access a business. Examples are online ordering and web-based check-ins. And as well all know, social media has taken off as marketing tool. Because franchisors recognize that the strategic use of digital marketing can be a complex (and at times, confusing) process, more and more of them are providing this expertise for their franchisees.

 

To learn more about these franchise trends and what they mean for you, contact a FranChoice franchise consultant.

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