1/ Per @SBA_Matthias here is a short thread on my experience and understanding of using a ROBs rollover to finance an #SMB acquisition. Note I have not completed this process yet but am learning a ton as I go.
2/ It almost seems too good to be true that you can use your hard earned 401k capital tax free and penalty free to finance your way into being an SMB entrepreneur but it is true.
3/ This is a great option for those who are not sitting on enough capital to make a down payment and use SBA financing and/or do not want dilute ownership or go through the process of raising capital. Also note: this is only an option for owner operators not searchers TBE
4/ Most importantly, note that the corporate structure is a C Corp. This is mandatory for ROBs. You cannot use a pass through entity like an LLC or S Corp if doing ROBs. This adds complexity but not so much it should scare people off.
5/ C Corp using ROBs means a few things: (i) your 401k will be the majority shareholder in the business. (ii) capital in your 401k once converted can be used to purchase businesses and operate the business (iii) you must be an active employee making a salary in the business
6/ You can rollover all your 401k/IRA into C Corp or a portion. You can always tap more. BIG PLUS: this is not a loan. There is no interest payment associated with these funds. This is your 401k’s cash that is investing in this entity.
7/ You need to hire a pro company such as @Guidant or @Benetrends to help set this up. Another PLUS: you can do this quickly with their help. You need their help to stay IRS compliant at all times. Risk is losing your C Corp status and having to pay taxes and penalties BAD!!!
8/ Taxes: people don’t like C Corp bc of double taxation. Yes your corporate profits are taxed (21% flat) but that’s AFTER your salary and other salaries and expenses are deducted as well as all other operational expenses.
9/ Taxes (cont) if you project cash flows well you can earn as much as any other entity after tax and use excess profits to run the business. Note your pay must align with your role in the company and cannot unduly burden the business. Part of compliance.
10/ Bottom Line: great way to finance an acquisition if you want to be an owner operator of 1 (or several) SMBs for people who have paid into 401ks for years. Work with the pros to set it up. Uncovering this has offered me amazing flexibility not to raise $ (person desire)
11/ ps: you cannot use a 401k administered by your current employer. -end-
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