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Incoming rumors

Guidant's two-week departure shakes up finance


In February, Guidant was the target of speculation when it suspended its small business financing "indefinitely." That indefinite period became two weeks, when the company decided to be proactive, rather than reactive.

Guidant Financial in Bellevue, Washington, shook up the franchising industry for two weeks this winter - based on a rumor.

Guidant, a financial firm founded in 2003 by real estate investors David Nilssen and Jeremy Ames, specializes in self-directed retirement plans, which owners use tax-free to buy real estate, buy up tax liens, start businesses or buy franchises. Since 2004, Guidant had arranged for 4,000 people to use their IRA or 401(k) funds to start franchises, and the firm was considered a leader in that financing niche.

In mid-February, just at the start of the International Franchise Association's annual convention, Guidant announced it was "indefinitely suspending" its small business financing. Franchisors and brokers gathered around the exhibit hall space where Guidant's booth should have been, and worried that the other top firms would follow suit, cutting off one of the only viable financing options still available for startup franchisees.

That didn't happen.

But two weeks later, Guidant announced it would resume arranging retirement rollovers to finance franchises. What happened here? On March 5, Guidant founder Nilssen and CEO Stephan Roche held a webinar to explain their actions. Basically, Roche said, Guidant had "heard a rumor" that the IRS planned to file an injunction against all firms that facilitate what the agency calls Rollovers as Business Startups, or, unfortunately, ROBS. Rather than wait to be told what to do, Guidant made a preemptive move, and stopped taking new applications. "We wanted to preserve the company," Roche said.

For two weeks, Guidant's law firms in Washington state and the District of Columbus worked with regulators in the IRS and the Department of Labor to determine if Guidant's approach to ROBS complies with the nation's tax laws.

"We know we made our clients anxious, some of our partners (franchisors, attorneys and brokers who refer clients to the firm) angry and our competitors confused," Roche said. "But we did catch the attention of the regulators."


Guidant learned the target of the IRS investigation were not the reputable firms, but rather "rogue promoters who improperly and abusively" help people access their retirement accounts "to buy Mercedes" or to open businesses they immediately shut down, Roche said. During an interview with Franchise Times, Roche could not name any of these "rogues." And although he said several times that Guidant's rollover structure is in "100-percent compliance" for startup businesses, Roche admitted the IRS would not give "clear sailing guidance" to the industry.

Guidant's hiatus should serve as a warning that IRA and 401(k) monies may not always be available to new franchisees. First of all, self-directed retirement plans were established in 1974 through the very complicated Employee Income Security Act, or ERISA. At any time, regulators may reinterpret portions of that act, especially the controversial guidelines that allow people to transfer untaxed funds into a franchise or other small business.

Secondly, the IRS is expected to approach existing ROBS with greater scrutiny. To use retirement funds to start a franchise, Roche said, the franchisee must transfer them into a new corporate entity called a C Corp, then sponsor a new 401(k) plan which can invest in the C Corp in exchange for stock in the new company. All the franchise's employees must be allowed to contribute to the 401(k), although their contributions will be invested in ordinary vehicles, like stocks. Since the franchisee's money may be used to build and operate the business, profits from the business must be returned to the 401(k), just as though the money had been invested in a stock or a bond. To increase the confusion, the new franchisee should not pay his salary from his own retirement monies.

Again, Guidant is taking preemptive action, and is calling on other rollover firms to work with them to develop consistent industry standards "which could mitigate future threats of action from key regulatory agencies," Roche said.

The IFA is also studying the issue. "This is a very technical area," said David French, the trade association's vice president of government relations. "We are mindful of how difficult it is to obtain financing today and a rollover is a valuable tool. But it takes a lot of professional expertise to get it right."

In the meantime, Guidant will be scanning the horizon, watching for more incoming rumors.

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