Small Business Success: ROBS 101
David Nilssen, serial entrepreneur and Guidant Financial’s CEO and co-founder, shares how each year thousands of entrepreneurs start a business debt free. David and his team have helped over 11,000 entrepreneurs invest almost $3 billion into small business using the Rollover for Business Start-ups arrangement (ROBS). ROBS allows you to invest up to 100 percent of your retirement funds in a new business or franchise without taking a taxable distribution or getting a loan.
Learn more about this alternative financing option for small business owners in our first video installment of the Small Business Success series.
No time for a quick video? Here’s the transcript:
David Nilssen: Over the past 12 years we’ve helped 10,000 people across the country to invest nearly $3 billion into small businesses and franchise establishments, using an arrangement called Rollovers for Business Start-ups or ROBS for short. ROBS is an arrangement that allows people to invest up to 100 percent of their retirement assets into a small business or franchise without taking a taxable distribution or even getting a loan. It’s a pretty simple process.
It works similar to investing in stock in a publicly traded company, like Microsoft. I would send my money to Microsoft and I would get to hold shares as collateral for that investment. They get to keep my money, and they get to build their empire and as they do well and as the business performs, my investment will rise and fall based on [the business’s] performance.
The same thing is happening in ROBS, except instead of investing in a publicly traded company like Microsoft, we’re investing in our own privately held organization.
Step one, is where you create a corporation and the corporation is going to serve as the business entity: how you’re going to operate. Then we create a 401(k) plan for that small business. Once those two have been created, we then can roll up to 100 percent of your existing IRA or 401(k), 403(b), any qualified retirement plan, into this new 401(k) plan and that is not a taxable event.
Then from there, the 401(k) plan simply invests in stock of the corporation. The money goes from the 401(k) plan into the corporation and it can be used for any ordinary business expense. The 401(k) plan gets to hold shares — it becomes a shareholder in the business and the outcome of that investment is based on the business’s performance.
But the important result is that they’ve made an investment in the small business that’s equity and not debt. Most small businesses take on a loan, which means that they have overhead and interest payments to make on a monthly basis.
Those that use Rollovers for Business Start-ups, can now take the initial cash that the business generates and invest it into the business itself, rather than sending it off to a bank in the form of interest payments. Thousands of people do this every single year — they invest their retirement assets in the small business. If you think that starting a business with equity instead of debt is right for you, then I highly encourage you to explore the option of Rollovers for Business Start-ups.
If you’re interested in small business ownership, but aren’t sure where to start, you can learn more about this alternative financing option here.