Can a 401k be treated like a self-funded investor in a ROBS transaction?

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April 02, 2022

by a searcher from Northwestern University - Kellogg School of Management in Atlanta, GA, USA

I’m curious if anyone has heard of structuring a ROBS acquisition where the entrepreneur’s 401k is treated like a self-funded investor. Let me use an example to better illustrate what I am getting at: *Purchase price = $5M *SBA loan = $4M *Seller note = $0.5M *401k investment = $0.4M *Entrepreneur’s cash investment = $0.1M My understanding is that typically the entrepreneur would take a 20% share of the equity and the 401k would take 80%, consistent with the investments made of $0.1M and $0.4M, respectively. Is it possible to instead treat the 401k like an independent investor in a self-funded deal and issue it <20% equity with the remainder going to the entrepreneur? The argument for the IRS would be that you aren’t disadvantaging your 401k if you are giving it terms that are aligned to market norms for independent investors in similar deals.
FYI – the goal would be to allow the entrepreneur to capture a larger share of any dividend payouts and potentially accelerate a buyout of the 401k and conversion to an S Corp (recognizing there is probably additional complexity to work through with this latter piece – e.g., including market standard terms around early redemption).

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Reply by a searcher
from North Carolina State University in Sykesville, MD 21784, USA
Having checked with Guidant, Solo401K, and Benetrends. They all say the same thing, that it's based on your equity injection percentage, as you stated. Granted, they aren't tax specialists, but they do make up the majority of the market for 401K ROBS. I think this is ridiculous because as you said it is not the market terms, but then again having the 401K ROBS in the first place is pretty spectacular.

I am in the same boat. The way I see it, is I can either get investors and have an LLC or an s-corp, and then use my money through a self-directed IRA to invest in other searchers/companies, or I have to live with the C-corp and most of the upside going to my retirement account.
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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
Hi ^redacted‌, good question. I posed it to Paul Cook at Guidant. Here is his response: This is not allowed as the retirement account is being charged a higher price per share and is in violation of the “adequate consideration” rule. Similar answer when someone asks about ‘sweat equity’ or ‘intellectual property’. No shares can be issued for either of those as there isn’t a tangible value attached.
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