To many of you, the ring of that headline is horrifying. You may not be interested in a franchise business. More likely, the thought of touching your retirement is too risky a proposition. Also, if you’re late in your career with shrinking employment options, financing a business using this method may present an unacceptable risk. Only you, the entrepreneur, can know that.
Several times over the past few years I have participated in entrepreneur panels for Right Management Consultants, a ManpowerGroup company. Right Management often assists mid- and late-career executives after they have been downsized or ‘outplaced.’
You would think outplacement is depressing, but the groups I’ve participated with spend time exploring the executive’s marketable skills and best career paths. Quite often these seasoned people have built up a nest egg and possess many of the attributes of a great entrepreneur—short of being willing to take the leap. Once you’re outplaced, that perceived risk is already out the window. Many professionals have nothing to lose and more to gain by considering going into business for themselves.
Before You Consider Funding Options, Are You the Franchise Type?
For many who have operated in a corporate culture, the idea of starting a business from scratch is daunting. Franchise businesses present an option where a model already exists and there is a presumed quicker path to cash flow through the support of the franchise network.
In 2015, franchise businesses contributed 8.9 million jobs, or 20% of the job creation in America, according to the US Department of Labor and the International Franchise Association. That makes franchise businesses second only to the US government in terms of job creation.
According to Leslie Kuban, owner of FranNet of Atlanta, some franchisors provide loan support to assist an owner in getting started, but most are not in the business of being the bank. Kuban, a long-time successful franchisor and franchisee had an interesting take on the risks for those entering the franchise space and the ways in which owners fund their businesses.
When Your Family Is Revered In Franchise Circles, You Drink The Koolaid
Leslie Kuban’s father, Phil Kuban, left a job as a successful marketing executive with
And the apple doesn’t fall far from the tree. With the help of her father, Leslie Kuban, straight out of college, took over a struggling Mailboxes Etc. location, turned it around, sold it and got a taste for the flavor of building equity rather than simply having a job.
Kuban grew her own career by taking what she learned about franchise turnarounds, consulting with others and ended up joining the team at FranNet. This may get a little confusing…now she’s a franchisor (she has an owner’s stake in FranNet) and she’s a franchisee (she owns and operates FranNet of Atlanta). She helps about 30 or more Atlanta entrepreneurs a year start their own franchise business. Nationwide, FranNet has about 110 consultants in 60 offices and helps about 500 to 600 people a year weigh the opportunities, challenges and funding realities of buying a franchise.
It Takes A Franchisee To Know One
Before you get to the funding part of the discussion, Kuban works to ensure the potential owner has the stuff that will lead to success in a franchise. After all, she knows first hand, and the success of her current business relies on helping entrepreneurs succeed. The phases Kuban works through with a prospective owner include:
- Education – How do franchises operate? How can an owner be successful in a franchise business?
- Alignment – What transferable skills does the potential owner have? What geography is of interest? What business models (including flexibility to come and go) align with the owner's ideal? How much income does the business needs to generate for the owner and their family (e.g. is there another income from a spouse or is this the family business?) It’s important to get alignment before considering a particular franchise.
- Selecting prospective franchises against the ‘Success Model’ – Based on all the wants, needs, skills and financial considerations, together Kuban and the prospective owner identify 5 to 6 franchises to explore. On average, for every 4 meetings, a franchisee moves forward. These are people that will be signing and starting the franchise in 60 to 90 days, not those interested in buying a franchise next year.
So What’s This About Funding The Franchise From Your Retirement?
While this isn’t the only way Kuban sees owners fund their franchise, leveraging the retirement nest egg is of growing interest to owners with limited access to capital. I immediately assumed that the funding occurred by taking a draw from retirement and rushing to restore it in a 6-month window. I was wrong.
There are specialists such as Benetrends, FranFund & Guidant Financial that can support the franchisee in setting up a special financial arrangement whereby they transfer the ownership of the franchise into the retirement plan. Kuban doesn’t recommend that your CPA or family estate attorney manage this for you as there are ongoing custodial compliance requirement on the retirement plan (ERISA).
This isn’t a loan; it is a stock transfer. The franchise must be set up as a C Corporation, and there are some tax consequences to consider, but there are advantages to this funding method. This is a limited debt, penalty-free way to partially or entirely fund a business startup.
When asked how risky this method is, Kuban felt it wasn’t any riskier than having to repay a loan to someone else. Some entrepreneurs have loved this approach and others she knows have hated it. She notes one entrepreneur that used this method in 2007 just before the 2008 market crash. While his peers saw their 401ks diminish, his retirement value appreciated because his plan was invested in his own successful business.
A Few Final Pieces of Financial Wisdom For Franchise Entrepreneurs
Kuban suggests that if you’re considering buying a franchise but are still employed elsewhere, buy a disability policy before you leave your job while you still have provable income.
Whatever working capital you think you need from your initial plan, double it. Don’t get caught by surprise when you realize what you need to operate.
Consider tightening your belt for the first two years. Some franchisees Kuban has known sold their fancy car, downsized their home and otherwise economized, so the business—and its profitability—could be the focus initially. The faster you get to positive, consistent cash flow, the more quickly the longer term flexibility will pay off. (And you can go back and buy that fancy car.)
Get into a business that is booming. Kuban, who touches more franchise businesses than most is seeing a big swell in several businesses including health food café’s, staffing businesses (particularly in niches like healthcare), and home cleaning (not new but solid, predictable, annuity revenue that can never be outsourced). According to ADP, the top 3 areas of job growth year over year in Q1 were personal services, auto parts/dealers and restaurants.
So what is scarier to you: The thought of being pushed out of a career and starting your first business at 45 or the idea of using your retirement to fund it?
