ROBS Transaction Advice

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May 04, 2023

by a searcher from University of Pennsylvania - The Wharton School in New York, NY, USA

Seeking advice on doing a ROBS equity contribution. I am looking for guidance on the mechanics and professional referrals to implement. Any assistance is greatly appreciated. Thank you all in advance.

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Reply by a searcher
from University of Pennsylvania in Portland, OR, USA
My wife and I acquired our business with the common self-funded structure: SBA 7(a) / Seller Note / Personal Cash. We used ROBS and funded 49% of the cash from my 401(k). My wife held the other 51% of the shares using our family's non-retirement funds. Without the 401(k) we would have drained every cent from our family's accounts to fund the deal and had no financial flexibility. An advantage of being an older searcher (48 when we closed) is having a meaningful amount built up in the 401(k). Just over a year after the acquisition we used cash generated by the business to buyback the shares from my 401(k), exited the ROBS structure, and converted to S-Corp status. During the period of time we were under the ROBS structure we used some of our remaining cash to buy a house near the business, so the concept of financial flexibility by tapping the 401(k) for the acquisition proved itself.

We used Guidant and regret it. My impression now is that Guidant is tailored to people who have no access to capital other than their retirement funds and buy main street businesses or small franchise territories. Look closely at their marketing material and that is the persona you will see. The support structure we experienced as clients was insufficient for a business with 30+ team members enrolled in the 401(k) after acquisition. Despite the size and complexity of our operation we never had a dedicated account rep once we signed the agreement with Guidant and every customer service experience was with a different person who answered our emails sent to the generic support@ address. I am thankful for the solid templates that Guidant created years ago and that helped us establish a compliant ROBS structure, but I am confident that there are more sophisticated and client-friendly providers out there.
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Reply by a searcher
from University of Illinois at Urbana in Rockford, IL, USA
I have two recommendations:
1) Find owners that are operating under a ROBS structure to learn about their experiences/perspectives. At the start, it was difficult for me to identify business owners that operated under ROBS. But I found two sources. One was SCORE, and the other was a reference list from Benetrends. SCORE is an organization with small business mentors. I found a lady that operated her business under ROBS for almost 20 years, her ROBS provider was Guidant Financial. I also was pleasantly surprised when Benetrends shared a list of references when I asked for it. Which was a big contrast to Guidant Financial, who made it politely difficult for me to get that information, so I never got one.
2) Discuss with a ROBS Lawyer your specific circumstances. When I did this, it opened a much deeper layer of understanding for my specific goals, circumstances, business structure, etc. I spoke with Alex Gardine from Southern Utah Tax Attorney, PLLC. He was very helpful, but you get charged for the time, so I was glad I did this after I had a very good understanding of the basics. Now, keep in mind that as part of the on-boarding process with Guidant (I imagine Benetrends too) you will get assigned an independent 3rd party ROBS lawyer, so you will get charged for this anyway as part of the ROBS setup fee.

I spoke with Guidant, Benetrends, 401K ROBS and a couple others. I gained a good understanding of ROBS and its requirements. Yet, I always struggled with getting the information only from a sales team. My two recommendations above helped get perspectives from a business owner, and an specific answers I was looking for from a lawyer that interacted with hundreds of business owners after they had executed on a ROBS structure.
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