Picking up prospects when 401(k)s are down: in any market, strong or weak, the use of 401(k) and other retirement plans should be part of a franchise system's marketing strategy to get qualified prospects involved.

Author:Fischer, Leonard

The use of the 401 (k) and other retirement plans to help individuals invest in franchises has become the norm. Even the IRS was forced in its Oct. 1, 2008 memorandum to field auditors to bless the procedure when properly done. It's hard to imagine that only seven to eight years ago the process of investing in franchises using retirement plans was virtually unknown. Now it is an integral part of many franchisors' financing strategies.

The recent decline in the stock market has been hair-raising; many of our clients, now joke that their 401 (k) has become a "201 (k)" or "101 1/2(k)" retirement plan. However, the drop in market value has actually caused an increased interest in using retirement plans for investing in franchises.


The drastic drop in stock prices brought home to many investors the huge risks of investing in the stock market versus investing in themselves. A recent article in the Tampa Bay Tribune quotes an individual who used his retirement account to invest in a franchise as saying "I'm not blind to the fact that there's always a risk, but just from a pure asset erosion standpoint, I think I am light years ahead." Which is safer, investing in a quality franchise or investing in a stock like General Motors?

More and more, the only way to qualify many individuals to invest in a franchise is through use of 401(k) or other retirement funds. Many of the alternative sources of funds are no longer available. Home-equity loans can no longer be used to provide equity investment in an SBA loan unless the loan is going to be repaid by someone other then the prospective franchisee. Further, the massive drop in market values of real estate and the tightness of the credit market have made home-equity loans a much smaller source of funds even if SBA loans are not available.

When can retirement funds be used by a prospective franchisee? There are a few hurdles. Generally, the prospective franchisee must have terminated employment with his last employer who holds the retirement funds. Note that this does not apply to funds in an Individual Retirement Account. In addition, the employer's plan must permit the employee to rollover his funds. It should be noted that Roth IRAs and death benefit distributions from an IRA paid to other than the spouse can't be used.

The process is simple, firms like...

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