If I use a ROBS to buy a small business
what if I just need a potion of the amount of the 401k and not all of it? if I can soon pay back the ROBS loan, can I get my 401k back and become an LLC?
Thanks for your question!
If you have not already, I highly recommend you read our ROBS Ultimate Guide.
You are not required to use all of your retirement funds when you perform a ROBS transaction, and many don’t. You have a couple of options:
Option 1) Transfer all of your retirement funds over to the new 401k, and use the portion necessary to purchase shares from your C-Corp while leaving the remaining money in the 401k and investing it in traditional options.
Option 2) Transfer only the amount necessary for the ROBS transaction, leaving your remaining retirement funds in an appropriate vehicle (such as an IRA).
For your second question, it’s important to keep in mind that when you use ROBS to fund your business, it is not a loan. Your 401k is an investor in your business. In order to unravel the ROBS transaction, you would need to purchase your shares back from your 401k.
This can get tricky because when you initially purchased the business it’s value was set by the negotiated sales price of the business. However, when you go to buy the shares back, your 401k needs to benefit from any increase in the value of the business. This buyback will require a business valuation in order to determine the purchase price of the shares.
For example: If you initially funded your business with $100,000 from a ROBS transaction, and now your business is worth $150,000, you would need to pay your 401k $150,000 to purchase the shares back.
Many businesses that used a ROBS transaction to start out keep the ROBS structure for the life of the business, as having a 401k for employees to participate in is seen as a benefit to the business. Another common way to exit from a ROBS arrangement is the sale of the business to a third party, which does not typically require a valuation.
Thanks again for your question, and best of luck to you!
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