ROBS: Terrible Acronym. Great Way to Start a Business

Guidant-Logo ROBS article

by David Nilssen, CEO & Co-founder, Guidant Financial

ROBS stands for Rollovers as Business Startups and despite the unfortunate acronym, they’re a viable—and completely legal—option for funding a business.
With this funding method, our clients buy their business or franchise using their retirement funds and do not tie their credit or other personal assets to the transaction. It means they don’t have to jeopardize their home or pay high interest costs. It means they start out with more capital to spend on advertising, equipment and hiring the best employees.

ROBS transactions generally involve five steps which, although complex, can be completed here at Guidant in less than three weeks:

  1. A C corporation is filed in the state of business
  2. A 401(k) is created that explicitly provides for the purchase of this type of corporation stock
  3. The client then rolls up to 100% of their eligible retirement funds into the newly created 401(k) plan
  4. This plan, in turn, invests in the stock of the new corporation
  5. The corporation, now flush with funds, acquires a small business or franchise

There are many reasons why an entrepreneur would choose to invest in their own business. These reasons may include, but are not limited to:

  • They believe a small business they own and control is the best investment for their retirement plan
  • This strategy can provide a debt-free equity injection for their enterprise
  • By creating a 401(k) plan, they have access to a wealth-building tool and can provide their employees with a benefit rarely seen in American small businesses today
  • They don’t have to risk their home or other collateral to start their business.

 

In 2008, the IRS circulated an internal document called “Guidelines Regarding Rollovers as Business Startups.” In it, they were critical of how some companies promoted such funding vehicles and how some individual business owners operated them. We share their concern. There are many ways that an entrepreneur can put their plan at risk. The good news is that those risks can be significantly reduced by working with a financial firm knowledgeable about and experienced in ROBS structures.

David Nilssen has been a featured speaker at over 350 national and international events, covering topics from entrepreneurship to small business financing. In 2007, the Small Business Administration (SBA) named him the National Young Entrepreneur of the Year. In 2011, he co-authored a book called Making the Jump into Small Business Ownership and was honored as one of the Top 100 Small Business Influencers. David is a past president of the Seattle Entrepreneur Organization and a former board advisor for Youth Ventures.

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