You can fund your franchise purchase with a ROBS – Rollover for Business Startups. ROBS provide the financial resources to fund your franchise purchase.
Here’s what you need to know about the ROBS process, including the pro’s and con’s.
How does a ROBS work?
Funds from eligible retirement accounts, including a 401(K), or a traditional individual retirement account, are rolled over into a franchise opportunity with the help of an attorney or a ROBS provider. These funds are invested in the franchise opportunity.
The structure:
A C corporation is formed with a corporate structure that allows shareholders. As a result, a new 401(K) plan is created for your franchise business.
The franchise owner’s existing retirement accounts are rolled into the new 401(k) plan. It is important to realize that most retirement accounts qualify for the rollover.
The rolled-over funds are used to purchase company stock in the C corporation. To that end, the proceeds from the sale of stock is the cash that is invested in the franchise opportunity.
PRO’s
ROBS is one financing option for your franchise investment
Lenders require strong personal credit, positive cash flow and collateral before approving a loan. A Rollover for Business Startups provides an option for an entrepreneur who has built up their retirement savings but who may otherwise have difficulty qualifying for a standard business loan.
You don’t take on debt
A ROBS isn’t a loan. You don’t have monthly payments with high interest fees or default concerns. You can reinvest more of your profits into your business. This is critical for most new and growing businesses.
You don’t pay penalties or taxes
Withdrawing funds directly from a 401(k) or IRA before turning 59½, create a 10% early withdrawal penalty and you will face a distribution tax. These are avoided with a ROBS.
CON’s
Your retirement may be at risk
Despite the potential payoff, there is a downside. If the franchise business fails, your retirement nest egg may also disappear.
You’ll lose out on retirement-savings gains
By committing your retirement nest egg to financing your franchise purchase, you will lose the potential gains from a rising stock market, tax-deferred savings of 401(k) and IRAs, and the power of compounding as investments grow over a long period of time. Remember though, on the other hand, there is a potential gain.
You must operate as a C corporation
A C corporation is the most common business structure for larger companies. The tax implications differ from sole proprietorships and limited liability companies.
You may be faced with costly fees
Leading ROBS providers may charge up to $4,995, plus a monthly administration fee. Their help you file the necessary IRS forms. It must be remembered that ROBS fees cannot be paid using the proceeds of the transaction.
The risk of an IRS audit may be greater
The IRS may look at you a little closer after completing a ROBS, according to Barbara Weltman, author of “J.K. Lasser’s Small Business Taxes 2017″
As a result, mistakes made during the transaction could wind up disqualifying the ROBS plan, which in turn could result in IRS penalties and may make the transaction taxable, Weltman says.
Guidant Financial CEO David Nilssen states only 0.33% of its ROBS clients faced an audit last year.
That suggests the likelihood of an IRS audit is extremely slim.
Does a ROBS make sense for you?
Weigh the pro’s and con’s of a ROBS for your franchise investment, and seek the advice of a qualified attorney or tax expert. Funding options also include: personal savings, bootstrapping or partners.
ROBS are great for people with the confidence and experience to invest in themselves.
For more important tips about investing in a franchise opportunity:
https://www.myfranchisepartners.com/