How to Buy a Business With a Rollover

By David Nilssen

To make their dreams of business ownership come true, many Americans turn to franchising or buying an existing business. Though some may think choosing the right concept is the biggest challenge facing these aspiring entrepreneurs, in reality they may have more trouble gaining access to inexpensive capital to fund their franchise.

The good news is that there’s an alternative option that more and more entrepreneurs are using to invest in their business.

Through an arrangement called Rollovers for Business Start-ups (ROBS), entrepreneurs are allowed to use their retirement funds such as 401(k)s and IRAs to invest in a franchise or to purchase a business without taking a taxable distribution. The key is to use a provider familiar with the arrangement to ensure compliance with all regulations and tax laws. And, ensure you are well versed in the ongoing obligations of the business.

My company, Guidant Financial, has streamlined the process to deliver these rollovers in a very short time frame. In fact, most transactions close in 21 days or less.

But, a quick turnaround time is not the only reason business buyers should consider using Rollover for Business Start-ups to fund their business. There are actually many benefits to going this route. Here are just a few:

  • You make the final investment decision and are not at the mercy of bank underwriting.
  • No collateral is used – not your house, credit or other assets.
  • Because it is an investment – not a loan – you can access up to 100 percent of your retirement funds and avoid making monthly payments, which frees up more money for marketing, equipment and other needs.
  • Funds can be combined with retirement monies from spouses or business partners.
  • And, if you require additional capital, this method can be combined with other small business financing.

So, how does this seemingly magical structure work? Here are the basic steps:

  1. Our firm creates a corporation and designs a new 401(k) plan for the client, who then in turn rolls their existing retirement funds into a new 401(k) plan.
  2. Once the funds are transferred into the new 401(k), the plan makes an investment into the newly formed corporation.
  3. The corporation then uses the investment to acquire a business or franchise and the 401(k) becomes the shareholder.
  4. The new businesses now cash-rich, debt-free and ready to go.

So – is ROBS the right solution for everyone? No. You must believe in your ability to lead and grow a business. The best way to determine whether this is right for you is through an in-depth consultation. Our team offers free, no-obligation consultations that will help clear up any questions aspiring entrepreneurs may have and give a more thorough virtual tour of the process.

In addition, anyone considering using ROBS to fund their new business should consult an experienced, knowledgeable attorney who is familiar with the ROBS transaction, as I am not a tax or ERISA attorney, and readers should not interpret this article as legal advice.

David Nilssen is the Co-founder and CEO of Guidant Financial and the author of Making the Jump into Small Business Ownership.

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