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Is owning a franchise right for you?

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May 28th, 2014

Many people who have reached retirement age aren’t ready to retire at all. They prefer to continue working but perhaps crave more flexibility or want to explore a different industry. Buying a franchise in retirement can provide an exciting encore career and may also create an additional income stream.

“Keeping engaged in retirement is really important and this is one way to do it,” says Jamie Hopkins, a professor and associate director of the New York Life Center for Retirement Income (retirement.theamericancollege....). “Plus, the money you generate from a franchise is inflation-protected, and outside of social security, people don’t have a lot of inflation protection. Franchise income can replace some of that guaranteed income.”

Terry Powell is the CEO of The Entrepreneur’s Source (entrepreneurssource.com), a company that provides coaching services for people who are considering purchasing a franchise. Powell says franchises are attractive in the current economic environment in which most investment portfolios aren’t delivering high enough returns to fund a comfortable retirement.

“What we’re finding is more people in the 60 to 75 age range are looking at that and saying, ‘I can diversify part of my passive portfolio into something that has me behind it. I can put money into a franchise that has a proven business model,’” Powell says. 

Franchises offer the chance to be entrepreneurial without “recreating the wheel” like you would when launching a brand new business, Powell says. Franchisors typically provide franchisees with a proven business model and other resources that can make it easier to get the business off the ground and provide owners with a greater sense of security.

Can be a full-time effort

But, Hopkins reminds would-be entrepreneurs that building a successful franchise does not come without hard work. He says franchisees should treat running the franchise as a full-time job, at least at the beginning. He says you might ultimately hire a manager, but the money you spend on salaries will reduce your profits.

“It’s not like I can take $200,000 and put it into a franchise, and I then sit back in retirement and collect a paycheck while other people show up and run it,” Hopkins says. “It’s going to be work, and things are going to come up.”

Franchises also require sizable financial investments. Powell says franchisees can expect to invest a minimum of $50,000 to $75,000 to purchase service-type franchises, and as much as $750,000 to purchase multiple units of a frozen yogurt chain, for example. That means you need substantial net worth and borrowing power to buy a franchise.

David Nilssen is the founder of Guidant Financial (guidantfinancial.com), a small business financing company. He says that in addition to Small Business Administration  loans, home equity loans and equipment leasing, many people leverage their 401(k)s to purchase franchises. The advantages of using a 401(k) are that the distribution isn’t taxable and you don’t have to pay interest, Nilssen says. But, there are some stipulations. Nilssen says the franchise must be organized as a C-corporation, the owner must work in the business, and he or she must offer a retirement plan to employees.

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