Rollover As Business Start-Up (ROBS) Structure, Attorney, etc.

May 04, 2022

by an investor from University of Illinois at Urbana-Champaign in Chicago, IL, USA

Working on a live small-ish deal (LOI signed) with an operator in an ETA type of structure where we intend to use an SBA 7(a) loan and ROBS structure. I have seen some info out here on ROBS, QSBS, etc. but the more we've dug in, the more it seems this concept should be much more pervasive and well known / understood in the ETA / search fund world - and it doesn't seem to be. Or at least I haven't intersected a lot of good info on it. So to that end, sharing about an ongoing live deal where we will attempt to get this structure done, and hopefully prod others to explore / learn. Will be happy to keep posting about our journey here in hopes it may be informative for others.

- We found what appears to be a really good attorney whose firm focuses on ERISA matters, and does a lot of ROBS deal. The firm is KLB Benefits Law Group (https://www.erisadc.com/) and the attorney is Dorothy "Doll" Lank. Found Doll via a podcast which is worth listening to if you want a quick primer (https://tech-money.com/podcast/27/).
- This is a highly regulated structure - how you set it up, how you maintain it, etc. are critical or one will be at risk of the whole thing being unwound (i.e. HUGELY expensive and time consuming). Using an attorney expert in my opinion is crucial. Between a 7(a) and a ROBS, you have to understand what you are getting into, and have strong legal and service provider support to keep you out of trouble. For what it's worth, my strong recommendation for things like this is to find a good attorney, and ask them what service providers they like / trust for the admin side. There are plenty of people "marketing" ROBS, but you really need to view it as a something you cannot risk screwing up. We will use a separate attorney for the deal side.
- For ROBS, company has to be a C-Corp, and investor has to be a W-2 employee with significant amount of time spent out of the gate.
- If done this way, and your hold period and other factors are met, you and your investors could also get QSBS (Qualified Small Business Stock) treatment on the after-tax invested dollars and potentially avoid cap gains tax on some / all gains from the transaction

That's a quick update, happy to post more as we go.

Reply by a searcher
from Emory University in Marietta, GA, USA

The ROBS program is great based on how much you intend to take out of your 401K. If you are only taking out $100,000 for example, you will be counting that money as "regular income" for the year, but if you use ROBS, you start C-Corp, buy share and that C-Corp loans you shares for your purchase, and they you have to repay and buy back to keep the money in the same tax bracket of the original 401K. Easy? No! a neat tax strategy? Yes. But how much do you have to pay to avoid a tax while spending multiple millions of dollars to buy a business? This is where you now need to pay people to help you actually complete this process. Is that worth it? It depends!

Reply by a searcher
from University of Pennsylvania in San Francisco, CA, USA

Thanks, Steve! I spoke with "Doll" at KLB Benefits Law Group today and will move forward with them. We have a more complex structure due to portfolio companies with current 401ks and she seemed confident in her ability to set it all up for success. A real pro!

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