Saturday, June 25, 2011

Ten Tips for Investing Retirement Funds into a Business or Franchise

Rollovers for business startups (ROBS) has become a very popular way to invest in a small business or franchise.  Here are 10 tips if you are considering buying a business this way:

1. Don't consider if you have less than $35,000. If you have a smaller amount of money it is likely easier and cheaper to take a distribution and how you are able to use those fund is more flexibility. Investing in your own business can be a great option if you have a solid model and a great business plan. Do not base your budgets on optimism alone.

2. Work with an outside tax attorney and CPA. If you choose to invest your retirement funds into a business you must follow the guidelines detailed in tax law and those governing retirement plans. Make sure you work with your own independent counsel to determine whether this form of investing is right for you. Along with your attorney, your tax professional must understand and embrace this strategy to adequately serve you. They must understand that your IRA's needs are different than yours and should be treated as such.

3. Understand the risks. When Enron collapsed, many people who had invested in company stock lost their investment. It was not taxable - but it did disappear. Understand that a business can fail and any money invested is exposed to this risk. While it is possible to invest up to 100% of your retirement funds into a business without paying taxes or penalties – once again, it is only you who can truly decide to make that leap. You have to objectively take a cold hard look at the facts. Ask the experts. Once you have done all that, it is up to you to decide. You must decide whether it is a prudent way to invest your retirement savings. Thousands of entrepreneurs invest their retirement funds into a business each year because they believe there is no one they would rather invest in.

4. Create a solid business plan. If you neglect to create a business plan for success – you indirectly create a plan for failure. The need to succeed is heightened by the fact you are investing a portion of your life savings into the business or franchise. After all, it’s not just anyone’s money, it’s your future! Make sure that you have built a solid business plan to grow your investment. Also, however long you *think* it will take to turn your first profit, plan for a longer runway. Most businesses produce negative cash flow in the beginning and that’s ok - remember, you planned for this. Whether you are buying a franchise or starting a business, plan for the "runway to profitability" to be slightly longer in the current economic environment. The number one reason businesses fail is not because they were a bad idea, but because they were undercapitalized. Make sure you have time for the investment to realize a return.

5. Build an advisory group. Make sure you have experienced counsel for your business transaction. Attorneys, CPAs, consultants, brokers and other experts specific to your business’ sector play a vital role in helping you identify, evaluate and acquire a great small business or franchise concept. Post-acquisition, you should build a support system of advisors who can help you nurture the business investment.

6. Treat it like a business. This is not monopoly money and you cannot treat the business' account as an extension of your own. The retirement plan will become an outside investor and thus the funds need to be treated as such. It might seem an unfair barrier, but it will keep your retirement plan and the business on the path to prosperity.

7. Verify the business' value. It is imperative that you purchase the business at fair market value (or less). Don’t underestimate the value of seasoned experts. Cheaper is not necessarily better—this is another step where you want the best professional help. If you are purchasing an existing business you should get an appraisal.

8. Select a firm carefully. There are very reputable firms with a proven track record that are capable of helping an individual correctly invest their retirement funds into a business. Investing your retirement funds into a business can be a phenomenal tool for building wealth. If done incorrectly, the taxpayer could be liable for taxes for early withdrawal. Work with a company that is experienced providing annual recordkeeping services and performing compliance testing for your specific plans.

9. Buy something with a track record. There are thousands of successful businesses being sold on any given day. There are many existing franchise concepts that have years of good history of driving positive cash flow to business owners. Check out the business model they have followed to get where they are. Many times, that is where you will see the best odds for success in the future.

10. Invest your retirement funds into a business only if YOU think it’s a great investment. The IRS is on the lookout for individuals who are abusing these laws to buy businesses simply to pay themselves a salary. You should have enough savings to live off of until the business is producing enough income to pay a reasonable salary. If you buy a solid business, have a great plan and execute with precision – you can be very successful. There’s a reason the small business is the backbone of the American economy, and it’s not creative bookkeeping.

To learn more about investing your IRA into a small business, contact Guidant Financial at 888.472.4455. Or visit the Small Business Financing section of our website.

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