Franchise Financing: Will a ROBS Plan Work for You?

ROBS plan

Looking at franchise financing options? If you have $50,000 or more in a 401(k), traditional IRA, or other tax-advantaged retirement fund, you may want to consider a ROBS (Rollovers as Business Startups) plan. A ROBS plan enables you to use money in your retirement account to fund your business without having to borrow against your account or cash it out.

Usually, if you take money out of a retirement account before age 59 1/2, you’ll need to pay income tax and a 10 percent penalty for the money you withdraw. Borrowing against a 401(k) requires repayment with interest. However, a ROBS plan is different and triggers neither a penalty nor repayment with interest. A ROBS plan is actually a rollover that invests directly in your business.

How a ROBS Plan Works

The mechanics of setting up a ROBS plan can be confusing. Consulting a qualified professional is essential. Here’s a simplified description of the steps involved:

  • Form a C Corporation
  • Establish a retirement plan for yourself and eligible employees. It can be either a profit-sharing or 401(k) plan.
  • Transfer funds from your old retirement account into the new retirement account.
  • Sell stock in your C corporation to the new retirement plan.
  • Use the proceeds from that stock sale to start or grow your business.

A ROBS plan isn’t for everyone, but it can offer a flexible, debt-free option under the right conditions. As with any business start-up, there are risks involved.

Advantages of a ROBS Plan

Here are some benefits:

  • No debt or interest. Launching your business without debt or interest to pay back is a huge win. You can reinvest any profits back into the business without debt eroding your cash flow.
  • No credit check. Most business loans take your credit history into consideration, but since a ROBS transaction is not a loan, you don’t have to worry about a credit check. Unlike borrowing options, a ROBS plan won’t affect your personal credit record.
  • Control of your retirement funds. Instead of having your retirement money sit with a brokerage house, you’re actually investing the funds in your business. Your savings will grow or decrease based on your business’s performance rather than an investment manager’s decisions or the whims of the market.
  • No early withdrawal penalties. A ROBS isn’t a distribution of retirement funds, so you won’t need to pay an IRS penalty.

Disdvantages of a ROBS Plan

Here are some drawbacks:

  • Retirement savings at risk. If your business fails, you will lose your retirement savings. (On the other hand, if you’ve borrowed money rather than using a ROBS and your business fails, you’ll have existing debt to pay back.)
  • Increased chance of audit. A ROBS plan poses a slightly increased risk of an audit by the IRS or Department of Labor.
  • Relatively slow to complete. The ROBS process can take 2 to 3 weeks, while a quick business loan can go through in as little as 24 hours.

A ROBS is a very specialized financing tool. As with any business decision, you should weigh the pros and cons with your individual circumstances in mind, and use a reputable provider to set up and manage your transaction. A FranChoice consultant can recommend trusted providers.