Does anyone have experience with ROBS plans?

February 02, 2022

by a searcher from University of California, Los Angeles - UCLA Anderson School of Management in Beverly Hills, CA, USA

Hey Searchfunders,

I've been considering a RollOver for Business Startup (ROBS) plan to fund a significant portion of my equity infusion. Basically you roll over your 401k funds into a newly established 401k plan that buys shares in the C Corp you create to purchase the target company. This allows you to use all of your 401k funds rather than taking an early withdrawal and paying the taxes/penalties. See companies like guidant financial or benetrends for additional info..

The funds in my 401k could put me in a position to purchase a business without the need for outside investors. However, the company needs to be a C-Corp as long as the 401k is invested in it, so they'll be a taxation hit. Over time I can purchase the shares back from the 401k and then change the corporate structure, but that will take several years and drain funds that could otherwise be reinvested, limiting the growth of the company. In the end, there is a fair amount to consider.

Does anyone out there have experience with these ROBS plans, thoughts on the tradeoffs, or additional considerations?

Thanks!

Reply by a lender
from University of Missouri in St. Louis, MO, USA

Chris, I have had three borrowers use this program in the past.If you would like an intro to discuss with them just let me know and I can put you in contact.I would ask the provider on the ROBS transaction about the C corp requirement.I know my last borrower that did this was an LLC so the C Corp might just need to be a pass through.I know the SBA had some issues with this program a year or two ago as well but they cleaned that up.feel free to DM me if you would like some intros. There are ongoing costs to this program as well since the provider is technically managing your money by completing this.Well above my knowledge base but this is a great option.Also, you might ask your accountant if there is a downside risk.For instance, if the company is the investment and you sell the company in 7 years, do you have to keep the proceeds back within the IRA?or is it just the original investment/return.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Great question.I have had several clients use them over the years for a portion if not their whole equity contribution.We have brokered the debt on those transactions and the lender has accepted it.You are right the acquiring entity has to be setup as a C-Corp, but I don't think the type of entity you are buying matters, so long as the ownership of those assets or entity falls into the C-Corp.I know how to structure it from the debt side.I would not say I am an expert on ROBS though, but if you are looking for companies that provide them, I can likely get some referrals from my past customers on who they used.Please let me know if I can be of any help. I can be reached at redacted

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