We frequently run across Entrepreneurs who are ready to buy their first business, but they can’t come up with enough cash for the down payment.Now, generally speaking, if your personal wealth is severely limited, we recommend that you save up at least a little bit for a little while for 3 reasons.

  • You have a financial safety net/cushion
  • Banks will take you more seriously
  • Sellers will take you more seriously

But what if you have been saving your money, and you do have a cushion but that savings is primarily in your 401K or other retirement account?  Should that count against you?  Absolutely not, and the good news is that it doesn’t have to.  You can utilize a program known as ROBS (Rollover for Business Startups), to fund your down payment straight from your 401K or retirement account.

This even works as a down payment along side an SBA Loan, which has some of the absolute toughest down payment requirements out there!

Here’s how it works.

First of all, ROBS should not be confused with a withdrawal or a loan against your retirement account.  Robs treats your business acquisition as an “investment” inside of your retirement account.  Investing your retirement in yourself?  We love that idea!  And the best part is, if managed properly, you will not pay any penalty or income tax for early withdrawal from your retirement!  And as an exceptional bonus, this will also allow your profits to grow tax free inside of your retirement account.

Here are a few basic requirements to be eligible:

  • You need to have one of the following types of retirement accounts.
    1. 401(k)
    2. 403(b)
    3. SEP
    4. TSP
    5. Keogh
    6. Traditional IRA
  • You need at least $50,000 available in your retirement account
  • Your retirement account can’t be associated with your current employer.
  • You need to be a legitimate employee of your new company (has to be set up as a C-corp)

This may seem like a dream come true to some of you out there, but like everything there are pros and cons.  Setting up a ROBS requires quite a bit of paperwork, and there are costs involved.  If this is something you are interested in, I would start by contacting your accountant or financial planner/advisor.

There are companies out there who specialize in ROBS, such as guidant who has a fairly detailed guide available here at https://www.guidantfinancial.com/401k-business-financing-robs-guide/. There are a few other providers out there as well, so please do your research, and again we recommend discussing it with your own accountant or financial advisor as well.

This may not be for everyone, but it’s nice to know that there are solutions for those of you out there who have diligently saved in a retirement account, and want to use some of it for a down payment on a business acquisition.

If you have any questions on this, we would love for you to join our free Business Buying Support Forum here, where we discuss topics like this and more. I hope to see you there.

Aaron Knight
Managing Director
Institute for Business Acquisitions


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