Sensible to use a ROBS 401k if you have the cash to fund the purchase?

November 12, 2024

by a searcher in San Jose, CA, USA

I found a great opportunity with a company grossing $2M and netting $600K. The owner is willing to provide 90% seller financing and I have more than enough cash to fund the business purchase. My understanding is that a big drawback of a ROBS 401k is the the double taxation because of the c-corp structure.

If I don't need it for the. liquidity, Are there other meaningful advantages of funding my business purchase with a ROBS 401k vs. directly? Tax deferral could be one, but with the corporate tax rate at 21% and my effective personal income tax at 33%, I'm not sure if it is truly a meaningful benefit.

Any thoughts or advice would be appreciated!

Update: I created this decision matrix to capture my understanding. Is this accurate, or are there other points of view missing?

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Reply by a searcher
from University of Illinois at Urbana in Rockford, IL, USA

Your decision matrix is spot-on in highlighting that a major driver for using ROBS is the need for liquidity, whether for the acquisition or to grow the business post-acquisition. One critical factor to consider is how much of the business the ROBS 401K would own, as exiting the ROBS arrangement in the future would require purchasing the shares held by the 401(k). Ideally, the business would have grown significantly over time. However, this growth could creates a challenge: From a ROBS lawyer I heard business owners that wanted to exit ROBS found it difficult to repurchase the shares due to the substantial amount of capital required. In such cases, they may either be unable to afford the buy-back or realized it made more sense to invest that money into further growing the business instead. If liquidity is not a driver, I am not sure there are many other meaningful advantages of ROBS than the one you already stated. The only one I can think of is to have an additional financial runway on your first years post-acquisition...and potentially allow for an exit after a few years, if that runway is no longer needed. In my view, ROBS offers a viable path to acquiring a larger business, in exchange of the ongoing maintenance fees, administrative responsibilities, and other ROBS nuances. I am not expert in this arena, but just my 2 cents based on the research and steps I've taken on this topic.

Reply by a searcher
from University of Illinois at Urbana in Naperville, IL, USA

I'm not entirely sure on the full answer to this question, but I did pick up this nugget somewhere along the line. Think about what percentage ownership you want the robs to have. Minority ownership in the business is generally going to be considered at a lower valuation than full control just like it would for any minority stake in a privately held business. That can help you manage the cost of buying the business back from robs. I don't have a lot of the nuance on this, because it hasn't become a serious consideration for me yet. But I found it very interesting when I stumbled across that perspective.

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