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Home > Tools and Resources > Buying a Franchise > Options for Retirees to Finance the Purchase of a Franchise

Options for Retirees to Finance the Purchase of a Franchise

By Vasilis Georgiou CBI, M&AMI, CBB, MBA, CIRM | President, CrossRoads Business Brokers, Inc.
Contact Vasilis Georgiou CBI, M&AMI, CBB, MBA, CIRM | Visit Website | About The Author

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There is an interesting trend in the franchising world where more and more retirees are showing increasing activity in buying franchises. The economic and work environment realities after the economic crisis, have forced many folks of the baby boomer generation to take matters into their own hands, so to speak. They are looking for ways to be masters of their own destiny through business ownership, but they want to do it in a measured, deliberate way that minimizes the risk as much as possible.

Starting a business is inherently risky, and there isn't such a thing as complete certainty of success. For a retiree or a baby boomer, that gives even more reasons for a pause for thought because time is not a luxury they can afford. That is why many are turning to the franchising model of business ownership where not only they can have access to well-publicized and regulated information about the performance of the system as a whole, but also have the opportunity to validate first-hand through interactions with existing franchisees.

Once a decision is made to buy a franchise that best fits individual aspirations, skills, and talents the question comes up as to the best financing approach that leverages existing assets, and does not deplete all capital, just in case it will be needed to sustain a longer launch effort. Many options exist, and the purpose of this article is to highlight them:

1. Retirement Funds and/or Savings
One inherent advantage retirees typically have is that after many years in various careers in industry, they have been able to accumulate some amount of retirement funds. There is a way for retirees to use these retirement funds to finance a franchise (or any business), tax free. Whereas in traditional borrowing you have to go through a rigorous and lengthy application process, leveraging retirement funds is typically faster and more straightforward. There are some benefits in this approach compared to other available options (Always consult with an accountant and a lawyer to ensure that your financial transaction is in complete compliance with law provisions):

This is how it works: One specific law, The Employee Retirement Income Security Act (ERISA), allows a variety of retirement savings accounts to be utilized as a vehicle for investing in various options, including buying a franchise. The chosen corporate vehicle is a "C corporation which you have to form, which then can be eligible to create its own 401k program. You can roll over (tax free) existing retirement funds into your new corporation's 401(k) program. The new corporation's 401(k) program can invest in the stock of the new "C" corporation which can then use the proceeds to buy the franchise. You can only use the funds in your 401(k) account after you leave the company where it originated.

2. *Small Business Administration (SBA)
There are several types of loans available through the SBA. The most commonly used for the purchase of a franchise is as follows:

As described on the SBA website (, the 7(a) Loan Program, which is the SBA's most common loan program, provides loans to businesses with requirements of eligibility based on specific aspects of the business and its principals. In other words, the key factors of eligibility are based on what the business does to receive its income, the qualifications and backgrounds of its owners, as well as where the business operates.

On the other hand, a 504 loan could be suitable for franchises that involve retail locations, or investment in equipment and machinery. Specifically, a 504 program can be used for:


3. Securities-Backed Financing
Another inherent advantage retirees typically have in funding a new franchise is that after many years in active investing, they have been able to accumulate some amount of stocks and bonds. They are then able to utilize qualified securities (i.e. stocks, bonds, mutual funds, U.S. Treasuries) to obtain a low interest line of credit.

There are advantages to using securities instead of traditional borrowing:

4. Home Equity
The housing market has recovered well recently from the worst downturn in recent years. A home equity line of credit (HELOC) can be used to fund a new business venture. You should carefully check interest rates and repayment terms.

5. Family and Friends
That is always a tricky approach. There is natural hesitation to mix family and friends with business. What if the whole franchise thing doesnt go well? Where is that going to do to the relationship? Those concerns are well justified. However, transparency and well written Agreements that spell out the financial and operational responsibilities of each investor, together with a clear disclaimer of the risks associated with new ventures, can mitigate some of the downside to leveraging this kind of resource.

6. Franchisor
Franchisors want to enable new franchisees to start a location. Especially if the franchisee candidate is qualified and shows promise of success. After all, franchisors have a long term royalty incentive in placing good franchisees in the system even if they take less cash up front, and have to finance some of the cost. They look at it as a win-win. The royalty annuity can be substantially more in the long term. That is why some franchisors offer programs that partially finance the upfront fees, especially if equipment assets are involved.

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About The Author

Mr. Georgiou is currently the President of CrossRoads Business Brokers, Inc. &, and has been involved in a great number of business transactions over the last 10 years. He is also a national Franchise Consultant with FranChoice advising hundreds of franchise Candidates in their search for a franchise. Since 2008, he has been a successful multi-unit owner/operator of a Home Care Franchise in California. Previously, Mr. Georgiou was a former Senior Manager with KPMG Consulting (BearingPoint) where he advised and assisted various Mid-Market companies with operations, strategy, and systems.

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