Funding Your Franchise Without Fear: Strategies for Smart Investing

Free Agent Podcast with Meg Schmitz – Guest: Michael Reeder, founder of Reeder CPA Group

Meg Schmitz:
Hi, everybody. And welcome to or welcome back to my podcast. It’s called The Free Agent. I am Meg Schmitz, your lovely host. The conversation here is all for me about the fact that y’all are free agents out there, you’re competing.

You need to stay relevant and effective. Whether you’re looking for a corporate career to make a shift or you’re looking to buy a business, you are a free agent, and you need to stay strong. You need to stay steady and surround yourself with really good people. My friend, the NFL free agent would back this up. It’s hard to find a new team if you’re not prepared and in training all the time.

The mission of my show is to share inspiring conversations with real people who took the leap into self employment, business ownership, franchising, and freedom. One of my favorite things about inviting Michael Reeder to come back onto the podcast, and thank you for being a returning guest, is that you are my go to tax advisor. You are my go to accountant. Your group is really dynamic. You’ve diversified, and grown people need to know about business ownership, benefits that come via taxes.

This is not something that people are trained to know. And so, for a lot of people who are getting into franchising for the first time, they need to get some insights into how to set up your business properly, number one, but then, number two, to have good resources for advice, because the whole game to me, Meg, is we all have to pay taxes, but you can leverage your business in a way that benefits your personal tax liabilities. And so I’d love to dive into not only that topic, and you’re well versed in franchising, which just helps tremendously. My people don’t need to explain jargon or try to explain to you what. What does a franchise agreement mean?
Or what is the franchise disclosure document? So you’re my go to guy for very good reasons. So let’s dive into. Here we are, beginning of election season, end of the year for 2024. Are there any hot topics that you’d like to jump in and talk about, things you are hearing about?

Michael Reeder:
Oh, geez, where do we start? You know, but let me just make a quick adjustment, because I was going to start out with, okay, everyone, the definition of a royalty is. Is altogether now, but you’re okay, so I can cross that out. All right, good.

So, hey, it’s great to be with you, Meg. It’s great to be with you all here in the Free Agent podcast. Michael Reeder, CPA, with you. So, yeah, I mean, it’s October 1, 2024, right? We have the vice presidential debate today, big showdown, and we get the election day coming up just a little bit over a month.

And, I mean, where do we start? I mean, the economy is on everyone’s mind. Interest rates are on everyone’s mind. You know? 

Do I stay in my with two job, whether it’s corporate, government, not for profit? Do I take the dive into business ownership? If I do, do I start from scratch, independent resale or franchise start from scratch? Or it’s just like, where to start? I think that, I think the economy is obviously on everyone’s mind. And interest rates.

And I know that there was a fed cut recently. I think that was a political move. But I mean at the end of the day, regardless, people are still going to the grocery store. People still have bills to pay. And so how do you do that?

What is the best decision for people and their family? You know, and then, like, what age are you? You know, I mean, like, ageism is real. Like, you know, I’m talking to a lot of people in, like, their, you know, mid fifties that just got laid off. They took a package, and they are going to throw their hat in the ring with business ownership via franchise because they just, you know, it’s just, they’re not going to be able to get what they were getting before.

And so, you know, I mean, I think that what a lot of people want to learn about a lot, what a lot of people are craving is, hey, Mike, if I do this business ownership thing, like, how does that, how does that work from a tax perspective? Right. And so there’s just, there’s so much to deep dive there. Is there anything, top of mind for you, Meg, that you want me to hit on, or do you want me to just, you know, just kind of keep going?

Meg:
Well, people, well, let’s break it down into some of the hot topics.

One is, yes, ageism for men and for women is a real thing. And there are more people coming to me saying, it’s time. I got to take ownership of this. But I’m worried about, let’s just start with the election. The outcome of the election for some people is a swing in their decision.

I don’t really understand that. I’m a business owner. Multiple times over. The election outcome has never really mattered to whether a consumer is going to consume the business that I own. Are you hearing this as well, that people are concerned whether now is a good time to invest in a business?

Michael:
Yeah. So, I mean, and, you know, you might, I mean, you being in the franchise space, you know, for multiple decades, like, you might have some interesting insight here as well, even though it’s never affected you personally. But, you know, in the 14 years that I’ve been so, I mean, I, I own the firm. For everyone that doesn’t know, I own a CPA firm. I own the firm that hired me out of college, 37 years old, been in public practice for about 14 years.

And I’ve been in the franchise industry as a niche, a CPA with a niche in the franchise industry working with franchisees for about nine years, so rounded up to a decade. And in the decade that I’ve been in the franchise industry as a CPA, talking to peers in the industry, the tendency, it’s like the worst the economy is, the higher the taxes, all that type of stuff tends to be like when more people do actually go and buy businesses.

And so I’m hearing rumblings, Mike, if Kamala Harris wins, taxes are going to go up. You know, I feel like I’m going to have to, I’m going to have to be a business owner because she’s going to increase taxes on corporations. They’re going to lay people off.

And if Trump wins, I feel like I may be able to keep my corporate job because the big corporations are going to get a tax cut. They’re going to hire more. But with that being said, you know, the tax code is still beneficial for a business owner, regardless of Harris wins or if Trump wins.

And so, you know, and then, so it’s just like, what’s the lifestyle? So I’m hearing more of a fear, like, if the economy, you know, and again, it’s just like, you know, like, who knows what’s going to happen, right? 

Meg:
This is all anecdotal. We don’t have, this is all here.

Michael:
It’s all, it’s there. It’s all anecdotal. It’s all crystal ball. And this is not like, you know, me getting political. This is just like, well, if it’s like, a lot of people have assumptions. Like, if Kamala Harris wins, this is gonna to happen. And if Trump wins, this is gonna to happen.

But, like, what if the opposite happens in each respective scenario? Like, anything can happen, you know? And so at the end of the day, you know, I still feel like even if there is a, like, if hypothetically, if Trump wins and taxes go down and, you know, you would think that corporations are hiring more like AI is still a thing, like AI. 

Meg:
Did you read, I was just reading this morning about the longshoremen strike and how they want to block advanced technology because it’s replacing jobs, but it’s creating more safety, it’s creating more efficiency.

So there’s this really strong dynamic between people wanting to keep their jobs, but technology being so much, or artificial intelligence as well, but let’s call it technology as a broad brushstroke here. It is going to disrupt people’s jobs and more ageism, more technology. That’s why it’s there to replace people whose backs break, who can’t get on their hands and knees anymore. There’s a very good reason to implement it. And yet I understand from a union standpoint, they’re there to protect their members and increase their pay.

In some ways, it’s just such a crazy dynamic that we’re going to disrupt supply chain when technology needs to take a bigger position in the world of efficiency and scalability.

Michael:
Yeah, and there’s no stopping the technology. There’s no stopping the AI. It’s coming whether we like it or not. It’s already here.

And so, I mean, so, and I think that the, it’s really interesting topic because there’s more at play than just the, the upcoming election. Like that’s, you know, that’s a fun thing to talk about. It’s great. Like, you know, dinner table, bar conversation, stuff like that. And it, and it does, like, there are things that go up, but like, we are, at the end of the day, we are in 2024.

AI is real. and also, you know, I mean, uh, just like, it’s a different world today than it was, you know, back in, you know, I don’t know, like the fifties and sixties, like, when like, unions were, strongholds and stuff. And even later than that, I mean, here, for example, like, you know, not about unions, just completely sub like lifestyle, right? Like people, people want to have job security. People want to make money.

People want to save money in taxes. People also just want to live a lifestyle that they’ve never been able to live before, you know. So, for example, just like here, like, as of today, right, October 1, 2024, I’m coming to you live from Eastern Europe. I’m in Bulgaria right now. I’ve been here in Bulgaria for several months.

My wife is from here. Her whole family is here, and I’m able to work I’m able to work. You know, I could, if I wanted to, I could work here, like all year round. I’m going to go back to the states in about like a month or like in like six weeks. And so.

But it’s just like, when I tell that story, man, Mike, like, that’s amazing. It’s like, you know, I talked to someone the other day who, like, they had, like, they had like a vacation fund for like, you know, like the two weeks out of the year, you know, and they can just go on vacation. And it’s like there are a lot, you know, so there’s a craving in today’s world and, you know, just where we are with technology, where we are with, you know, this post Covid era where like, you know, with this, like, work from home just kind of brought about like the work culture and just social media, like, you know, I mean, there is a craving to do something different. There’s a recognition that we’re only on this earth for so long, so let’s live life to the fullest. And things are breaking down like old institutions are breaking down.

I mean, we can do a whole other podcast. Like, we’re homeschooling my wife and I. We’re homeschooling our daughter. And like, you know, the disruption in education is a whole other podcast for like another day that we probably need like 10 hours to talk about, you know, so it’s just like, we’re in like a period of time right now. There’s lots of disruption, and people are just like, looking at the norms of, like, how it’s always been and saying, well, how can we do it differently?

And being your own business owner and what goes into that is a material part of the conversation. 

Meg:
So one of the things that I rely on you to do, getting back to an earlier topic, is explaining to future business owners who’ve never owned a franchise or an independent business how how it is that owning a business ends up being a tax benefit not only on the business side, but also then implications on the personal side. So let’s dive into that because there are very strong reasons why even a bigger ticket investment is going to benefit your personal tax situation. So let’s break that down a little bit.

Michael:
Yeah, absolutely. So, I mean, at the end of the day, the tax code is written for the self employed. I would say that it’s written for business owners and real estate investors or real estate professionals. And so the major reason is because you can write off a lot of business expenses against your business income, and that’s just not at your disposal when you’re strictly a w, two employee of a company that you don’t have ownership in. And so just understanding that, that the tax code is written for the self employed.

So when it comes to all, like, the deductions, you know, you’re just, there’s so many deductions that open up that are at your disposal when you’re a business owner that are just not at play.

Meg:
Give some examples. The top five deductions that people don’t realize. When you own a business, you can’t do it personally because you have a paycheck.

But if you own a business, here are your top five write offs.

Michael:
All right, so let’s just go right out the gate. You know, capital expenditures of fixed assets. Right? I, so fixed assets, right.

Hard assets like vehicles, machinery, equipment, furniture, leasehold improvements. Right. So just, and then also real estate, is it commercial or residential, you know cost segregation study where you can pretty much accelerate the depreciation of the real estate.

So just capital expenditures like big ticket items, usually when you purchase them, like, you know, like the, usually you have to capitalize them as an asset. You can’t write them off in full, but for several of them, you actually could potentially write them off in full, depending on the type of depreciation.

Depending on the type of asset. So accelerated depreciation of fixed assets or capital expenditures, huge. Right now, all of the traveling that you’re doing for the hustle and bustle of your day to day business.

So all of the fuel, the travel, the parking, the tolls, so lots of travel expenses, for meals, you know about like half that you can write off tax purposes. And then, so self employed retirement plans, right.

When you, when you are a, when you’re a corporate employee, you know, you’re limited to how much you can put away for your, to your 401K, for example, like, you know, you can put away 23,000 to 30,000, depending on your age, and then you can, you know, potentially, you know, then there might be some sort of profit sharing. But if you have your own business and whether it’s like, whether you’re the only employee and you have subcontractors or you have other employees, like you have, you have the ability to put away more, and to have not only a 401K plan, but also a defined benefit plan known as a pension plan, right? So self employed retirement plans are huge. 

You know that you have more flexibility and ability to put away more when you’re a business owner versus self employed.

But now there’s an interesting thing here. It’s not really a deduction, but this is something that I talk about a lot. It’s not necessarily a deduction, but it’s the, it’s the ability and flexibility to control. See, this is huge, right? Because I get asked this all the time, like, hey, Mike, like, if I earn, like, like I’m trying to, if I earn 300,000 on a w two, is that equal to, like earning like 240 on a business?

You know, because, like, you take the deductions, like, I end up paying the same tax. So it’s, it’s like we can dive into that. But, like, I’ve thought about it a lot and, like, what’s, what is huge as a business owner, what is huge, right. And from one business owner to another, I know that you can relate to this. Meg is the because, and it’s just perfect because we’re coming in Q four right now.

The ability as a business owner, the ability to control the timing of recognition of revenue and expenses, that is huge. You can have a great year, and on paper, you made this much money, but then you have the ability to prepay a bunch of expenses that you know you’re going to pay in Q one of next year. You can pay them now. And like, you know, so on paper, it looks like you actually lost money, and then vice versa, you know, you have all this revenue coming in, but you can kind of control the timing of recognizing it. So, like, the deferral of revenue and the acceleration expenses is huge.

Is a huge benefit that you have as a business owner. That ability to control that is huge from a year over year tax savings standpoint. 

Meg:
So, for example, I, going back to, I’m glad you brought this up about the self employed retirement plan. Many people have money in retirement right now. They’re coming out of a job.

They’ve got a retirement account. They’re young enough. I’m 61. I’ve always tapped into my retirement plan to fund the startup of a business. I’ve also used home equity.

I’ve also used my asset-backed securities. So I am one who’s very comfortable leveraging my own assets to borrow against those. So going back to retirement, there’s the rollover business startup or robs plan that a lot of people are afraid of until they understand that as a business owner, you’re taking money out of your current retirement plan, you’re legitimately legally not taxed or penalized by the IRS to do this, you move it into a self-funding startup for your franchise.

Then as your franchise matures and you are at cash flow positive, you are profitable. A good advisor, tax advisor would say now is the time to set up that self-directed, self-employed retirement plan. So you’re taking it from here, putting it into your new silo of a business, and then as a tax benefit strategy, you’re going to take a big chunk of your profitability out and put it into a different retirement plan. So you’re effectively replacing one retirement tool with another one. Only now it’s benefiting your personal tax situation because you’re reducing what you’re reporting as profitability in your business by moving more funds into this self-employed retirement plan. Correct?

Michael:
So, yeah, so what you’re referring to is the rollover business startup, you know, known as the robs. And the robs is a funding tool that is available to use in the world of purchasing businesses, purchasing franchises, etc.

Yes. And so essentially, you know, there is a lot to the robs. And so like, and I’m really big on like educating people that are going into robs. Everything that goes into, it’s like, hey, what is it? Because like when you go robs, how it works is you’re setting up a corporation, and that corporation has to be a C corporation.

And the way it’s structured is that the actual majority shareholder, if not the entire shareholder, the 100% shareholder of the C corporation is the retirement plan itself, of the C corporation. So because of that structure, it allows you to take old retirement assets to fund your business tax and penalty free, and to use for the investment and for the operations. And then to your point, once it’s in, like, once you have profit in the business, then you can make retirement contributions from that business’s profit back into your retirement plan with that business. And it can be invested in other investments, other mutual funds, or more stock of the business like itself as you put the profits back into the retirement plan.

And then at some point in the future, when you sell, you can have an exit. And then you essentially, the actual stock of the C corporation itself can appreciate so much to where it’s just like where you started out with your retirement plan being this. And then you bet on yourself, right? And then you had, and then you sold, and like the proceeds from sale went back into the retirement plan. And now the value of retirement is this, right. While meanwhile, the market is over here, you know, doing like, you know, drips and drabs and so, like, that is the Rob C corporation.

It is a very interesting, it is a very intriguing option. And so when it comes to starting your own business and how to fund it. Right? And so, like, the classic example is, do I do robs or do I do SBA or do I do both? And you mentioned home equity line of credit and securities, back line of credit.

That’s great stuff. And then so on the retire, like, so I think that this is what I’m really passionate about. I think that when it comes to funding your business and like, and when reviewing the options of, you know, retire. So I think that Rob’s needs to be part of a, it needs to be a sub component on the umbrella term when reviewing retirement assets.

Needs to be retirement asset funding. What are my options when it comes to retirement asset funding? Because there are multiple things there, right? There’s the Rob C corporation as one option. There is for smaller amounts, there’s just a 401.

Just doing an LLC with a 401k plan and being able to do a $50,000 participant loan with the. You can even do that from your current employer if you or your spouse are still going to work at your current employer. Right. 401, 401k participant loans. That is one chapter of retirement asset funding.

That is another option. In addition to robs. Also, what about Roth, right Roth distributions. You can take Roth original contributions to a Roth you can take out at any time, tax and penalty free. So it’s pretty much just like a glorified savings account.

And so it’s just like what that needs to be discussed as well. And then also there needs to be the feasibility analysis of, you know, just straight distributions, like a normal distribution depending on your age, whether it’s subject to 10% penalty or not and then, you know, and then what are you in? Because, like, if you’re doing a, for example, like, if you’re doing a brick and mortar and, like, you or your spouse bring, like, six or seven figure w two income to your personal return, and you’re doing this brick and mortar at the same time, and, like, this brick and mortar, like, you know, 500 to a million plus of startup investment, and it’s going to have this big tax loss due to ramping up from zero and having all this accelerated depreciation that we just talked about ten minutes ago, you could create a lot like a big loss. Right.

And that loss can offset your taxable distribution or your spouse and. Or your spouse’s high w two income on your personal return. And like, so that needs to be discussed, right? And then, because in a c corporation, a c corporation doesn’t flow through profits and losses to the personal return like an LLC or an escort partnership does. So it’s like, that needs to be discussed.

And so it’s like, I think the umbrella term that needs to be talked about in the industry is, all right, here’s retirement asset funding, right? And then, like, that’s the. That’s the story of the book, right? And then, like, the chapters are, there’s robs, there’s 401K participant loans, there’s Roth distributions, there’s. There’s early distributions and normal distributions from a regular four, from a regular retirement plan, and kind of how they all interplay with each other.

And then there’s another book over here called strategic use of good debt. Right. Strategic use of debt. Right.

Meg:
Thank you. 

Michael: 
Strategic use of debt. Yeah. Secure. Like, home equity line of credit, securities back line of credit.

SBA loans. Let’s talk about SBA loans. Right? Like, this is interesting because it’s like, you know, in this economy that we’re in today, like, in this environment, like, I can’t tell you how many. Like, one of the faqs I get.

It’s kind of like the faq slash, like frequently asked like statement. It’s like they’re not asking me, they’re just like saying, it’s just like, man, interest rate.

They’re not saying like, Mike, what about this or that? They’re just saying like, Mike, interest rates are through the roof. Like SBA is definitely not an option. And I’m like, all right, well, let’s unpack that a little bit, You know, because strategic use of good debt.

You know, because strategic use of good debt, right. Because if it’s, like, personal credit card debt, that’s not good debt. Like, you can’t like, you’re paying, like, huge interest rate and you can’t really write any of that off. Yep. Your mortgage on your house, on your primary, it it could be good debt if you itemize deductions instead of standard.

But even if that’s the case, you’re most likely just getting a tax break on the federal and not the state, depending on what state you’re in. And so but an SBA loan, right, interest on the business loan, right, assuming that it’s not some, like, juice loan from one of those, like, merchant processor advances where it’s, like, 40% interest, like, that’s bad debt. And so but, like, SBA, even if it’s at, like, you know, ten, eleven, 12 percent, which is scary, right

Like, you’re able to proceeds from that loan are going to a business, you know, like an activity that’s going to produce a profit, and you’re going to be able to write off all that interest. So I always tell people when you look at an interest on a reason, on a business loan such as SBA or a conventional bank loan, you know, or if you’re going to let you know, like, you know, on these, you know, whatever, the interest is really only two thirds of it.

Like, it really only is two thirds of what it is because for every dollar in interest expense you’re saving $0.30 in taxes. And so, like, I try to educate people on like this, and then, like, oh, by the way, when you do that, you’re gonna and you’re gonna be structured a certain way, and we’re gonna do this and that with your loss and, like, your spouse’s w two and your startup loss from your brick and mortar. And, like, you can see, like, all these different factors get taken into the equation.

So it’s like, strategic use of good debt is huge.

And, like, whenever I have that, in that conversation, I feel like when I’m done with you today, I think I have like four or five calls with franchise buyers today just to talk about this type of stuff, right, and it’s just like entity structure strategy and funding strategy, right.

And so it’s like I always, I just, I get my, I get my piece of paper and I say, hi, mister and misses franchise buyer. All right, but what are your three buckets? Whats your investment level?

I’ll talk to someone doing a home based business all in first year, 150k. Like one third of thats the franchise fee. The other 100k is working capital. Okay. Just like a work from home, senior care, business, whatever.

And then I will talk to another person doing an image studios. I gotta give a plug to image studios right there for you. Then people like a Houndstown, you know, the huge, you know, like a Houndstown over here. Big, huge build out. this person over here, like a $300,000, like, you know, home service brand or whatever.

So it’s like bucket one, what’s your investment level? Bucket two, what are the assets on your personal financial statement? Right. In bucket three, what is your household income and expense? I’ll get those three buckets from each person that I.

Meg:
I can. I think the long and short of it is, in giving each of those four examples, different types of businesses and different investment levels, there’s no. If you’re listening this far into the program, Mike can’t answer exactly what that benefit is going to be, because every tax situation is unique, every investment portfolio, and how you, the listener, is utilizing your money. Your strategy is going to vary from anybody else in the world.

But what you really have to understand as a business owner is, and I get this all the time, I don’t want to take on more debt. Well, you need to realize the difference between bad debt and good debt. I’m afraid to get a loan because the interest rate is so high. You know what? It’s not that high.

Historically, interest rates have been. When I first invested in great clips, I was paying 15% to 18%. Where are we right now? We’re not anywhere close to 15, and I still was profitable. So you need to understand that talking to somebody like Mike or anybody in his group, you need to really get out of your own head trash. This won’t work. I’m afraid of that. Oh, I shouldn’t do a c corp. I would really rather do an LLC.

Yeah, but if your best investment in yourself is leveraging retirement. Don’t why are you afraid of a c corp? Is. Is something simply because you don’t understand the financial structure. And that’s why I recommend people to talk to you, is that we’re going through this at a pretty quick pace today in the podcast.

But to break all of these different benefits out and into the individual’s unique situation, this is why you need to have a guy like Mike on your side to make clarity of things that you are fearful of or just uncertain and unknowledgeable about.

Michael:
Yeah, and that’s like, the key there is just, you know, how your situation is different from person b and person C. And so you have, in order to have a substantive conversation about how is the best way to structure your business entity structure and how to fund it, we have to do a deep dive into your personal situation because it may be different than the next person.

And then also what needs to be discussed is you know, you may have like a certain paranoia to like debt.

It seems like Meg like you and I are very comfortable with leveraging our assets to like start our business and and so like I’m very comfortable leveraging my assets, you know, a strategic use of good debt. Right.

And so I would rather do that than put my nest egg at risk as plan a. But then other people that I talked to would rather put their nest egg at risk as plan a and not take on debt because they hate the d word.

And it just like you know and if it’s gonna keep them up at night and it’s gonna cause them anxiety well then like you know that person’s, like, you know, emotional reaction to either debt or putting assets at risk, like, has to be discussed.

And so, you know, so it’s like, I have some clients that it doesn’t matter, like what, how much logic I told them to go one way or the other. They went the other, just because it’s just like they were more comfortable. They would, they just wanted to get all their money out of the market, like all of their retirement out of the market and just, and just bet on themselves and that’s it. Like they they didn’t wanna have any debt. Right.

Yeah, and I’ve talked to other people where it was just like, they just want to preserve their nest egg and just use other people’s money. Right. Other people in the bank of, in the context of SBA and bank and leverage their, you know, and use that as plan A and tap into their nest egg as plan B.

And so as if you’re listening here, you know, you can just see there’s lots to unpack here. There’s really no, like, painting everything with one broad brushstroke and it’s a deep dive conversation. But, you know, there’s, you know, and we’re going to unpack everything and we’re going to figure out what is the most optimal for you.

And at the end of the day, the tax code is written for the self employed. And so we have to navigate it very carefully.

Meg:
Yep. There is no one right answer. There’s no one way to do, to do the thing. As you get into business then, and start realizing profitability, this is what happened. I see it happen for myself, but I see it over the last 22 years, I’ve been a consultant.

I stay in touch with everybody I’ve ever placed. That’s option for them. They don’t have to stay in touch with me, but I reach out when they are at that point where they’re profitable, they’ve replaced income. I can’t tell you how many people have said, I was so afraid going into this, and now here I am. I want to do it again.

And so all I ask of anybody that I refer to you or also to a franchise attorney, ask questions. Don’t lead with what you’re afraid of. I guess. Lead with what you’re afraid of. And ask the question because the answer might surprise you.

The answer might confirm what you’re uncomfortable about. But ask the question and get informed because knowledge is everything. Facts are everything. You can do a whole lot with KPI’s key performance indicators if you’re not breaking it down by the numbers. So this is why I refer to you as my kind of my side pocket here, my expert in taxation and all things financial.

So with that, I’m going to thank you profusely for all the content that we were able to cover today. And I look forward to getting this episode up. The last one was highly viewed and rated. And so this is what we do, is educate and illuminate for the people who are curious about moving forward with business ownership. You are a business owner, Mike.

Michael:
I am. And I’m here for all of you other business owners out there, all you free agents out there. Thank you.