Buying a Restaurant Using Retirement Money

Posted by Robin Gagnon on Jan 19, 2012 10:25:00 PM

Using 401K for Buying a RestaurantThe tight credit environment created over the past few years has forced those interested in buying a restaurant to seek more creative approaches to their funding challenge.  One option that’s gaining traction with many buyers is a 401K conversion option.  The Employee Retirement Income Security Act (otherwise known as ERISA) passed in 1974 created the opportunity when it essentially passed the responsibility of retirement saving from the employer to the employee. So while buying a restaurant using these funds is not a new idea, it is one that is growing in popularity.  A combination of tight lending practices and low stock market performances created by the weak economy make this a more attractive option than it would have been a few years ago. 

Investing your existing IRA or 401(k) funds into launching a business of your own is a straightforward and tax free process.  You don't have to take a taxable distribution, because you are buying stock, as an investment, in your new company. And you needn't apply for a loan, because you'll be using your own money, interest-free.

One benefit of buying a restaurant this way is the short time to close the transaction.  Most transactions can be completed in less than a month.  While it is quick, it’s not for the uninformed.  The process requires that you work with a specialized firm that has the legal and financial resources to fund your deal with your retirement savings.  Restaurant brokers helping you in buying a restaurant will have contacts for the best firms in the industry.  One of the largest and most reliable is Guidant Corporation.  They have funded over 7,000 businesses and assisted in transferring more than $3 billion in retirement assets.  Once you’ve contacted a specialist like Guidant, then buying a restaurant with your own 401(k) or IRA funds can be as simple as finding following the steps below.

STEP 1 | Form a Corporation
The rollover company will form this corporation or work with your attorney during the formation process.

STEP 2 | Corporation Sponsors a 401(k) Plan
The 401(k) Plan is designed to allow for investment into your corporation and should come with a favorable determination letter from the IRS.

STEP 3 | Rollover to new 401(k) Plan
The next step is moving your retirement funds from your previous employer or IRA into the new 401(k) Plan.

STEP 4 | 401(k) Plan Invests in the Corporation
Your new 401(k) Plan purchases stock in the corporation. This 401(k) Plan now holds stock in the corporation and the business is debt-free and cash-rich from the sale of the stock. At this point, the corporation will now be able to purchase your new business or franchise.

The advantages of the plan are that you are now buying a restaurant on a debt free basis.  You are able to invest directly in yourself and enjoy tax-deferred savings.  If you’re interested in buying a restaurant using your 401(k) savings, follow this link to Guidant Corporation for a review with one of their specialists.
Read also, Buying a Restaurant with Low (or no) Money Down.
Download the Free Guide to Buying a Restaurant
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Robin Gagnon, Certified Restaurant Broker®, MBA, CBI, CFE is the co-founder of We Sell Restaurants and industry expert in restaurant sales and valuation. Named by Nation’s Restaurant News as one of the “Most Influential Suppliers and Vendors” to the restaurant industry, her articles and expertise appear nationwide in QSR Magazine, Franchising World, Forbes, Yahoo Finance, and BizBuySell. She is the co-author of Appetite for Acquisition, an award-winning book on buying restaurants.

Topics: Buying a Restaurant

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