Patrick:
Hello, and welcome to our Build a Better Future, Your Small Business Ownership Questions Answered webinar. I appreciate you guys joining us today.
So, a little bit about Guidant. Our vision is to increase the number of people who succeed in small business. We were founded in 2003. We’re still owned by the two co-founders; since then, we’ve grown to 100+ employees. In that time, we’ve helped fund over 20,000 small businesses, and in that process, deployed over $4 billion in capital into the economy.
And what we’re most proud of is that it has helped create 85,000 US jobs. The way we’ve done that over the years is through a full suite of financing options. So, today you’ll hear us talk about business startups and ROBS, a lot of questions we get around that, as well as SBA loans. But we also help serve people as they’re looking to build their business and even as they go to sell their business, with some of our business services. So this is kind of what we offer to help people with money to start or buy a business.
We’re definitely the industry leader within the ROBS space. Last year we were recognized by Entrepreneur as one of their top franchise suppliers for the funding we provide to the franchise industry. Year over year, we win the Best Rollover for Business Startups provider from Fit Small Business, and we’ve been on the Inc. 5000 and frequently listed as a Best Company to Work For in the Washington or Puget Sound area.
Today on our panel, we’ve got a great group of people. We’ve got Josh Levelle, Keith Tracy, Bill Seitz, and Michael Stein, all Senior Financing Consultants here at Guidant Financial. We also have Ryan Gaines, who is one of our SBA Loan Consultants, joining us today for this call.
A little bit of the agenda and a little bit of why we did this. Right now, as we’re looking to move into the future here, recovery for small businesses is a topical trend. It’s the thing that helps to build and grow, and it’ll help move us forward. Every day our consultants are getting questions, whether it was now or in the past. We always get some more questions that we want to share with the audience, but we’re getting a few more questions today. We want to make sure that we can help share that knowledge with people. So, if they’re looking to help create a new future for themselves by starting a small business, they have the information they need to do so.
Today we’re going to go over some general business landscape questions that we’re getting lately. We’re going to be covering the state of SBA 70 lending, how to fund a business, and the questions we get around funding with retirement funds or ROBS. Just the general common questions we get. And then hopefully we’ll have some additional time for questions that you, the audience, have specifically. We’ll put that up to the consultants.
So, with that, we’ll get going into the questions. We’ll start with the business landscape ones. One question we frequently get is, what businesses are people buying and starting? Michael, would you mind getting started with that?
Michael:
Yes, thanks, Patrick. We see a lot of businesses, a lot of different varieties. Most common lately have been e-commerce businesses, liquor stores, IT, and cybersecurity. Temporary staffing agencies have been big. Mathnasium, Kumon, tutoring companies like that. Pet supplies, college nannies, and tutors. The list is pretty long. I’d add food delivery, and mail and shipping businesses are big. Anything medical or nonmedical transport-related is big. Veterinarian medics, you know, medical emergency services have been pretty, pretty popular. I’m sure there’s more.
Bill, you probably have a good list to add to that too. Do you want to chime in there?
Bill:
Yes, thanks, Michael. Some of the businesses I’m seeing with my clients are trucking logistics, delivery service-type businesses, certainly cleaning companies, handyman and maintenance. Also, senior care (stay-at-home) nonmedical services, RV parks, trailer parks, campgrounds, the list goes on and on. But really, it’s your dream. It’s about what makes sense from your side. So, you’ll really control that. We’re here to help you raise the right capital and bring that into reality.
Patrick:
Thank you, guys, for sharing those. The next question I’ll put to Keith. Keith has been with us since 2003 when we founded the company. He was employee number three, so he’s been through the 2008 recession. So, I think it would be a great question for you to take for us: what are some recession-proof businesses that you’ve seen?
Keith:
Yes, I appreciate that. Some of the businesses that both Michael and Bill listed fall in that same category. And I think recession-proof is a difficult phrase – if nothing else, I would say “recession-resistant.” But certainly, some of the things they mentioned in today’s environment with the COVID crisis, there are even some things that are sort of rising to the top, but you’ll look at grocery and grocery stores and markets that people start or purchase. I think Bill mentioned it, especially with what I would call “the Amazon effect,” the mail and packing, and shipping-type businesses. In all types of economies, liquor stores are certainly strong, maybe some of the other things that they mentioned that aren’t usually thought about, especially with adding in the pandemic. Things like dog kennels and doggy daycares, where people still have to go to work and put their pets somewhere.
While things like campgrounds and RV parks, where you’d still want to social distance, are still a great business, especially because it includes real estate. A recessionary economy causes unemployment, as we know, with 20 to 30 million people out of work. So, staffing and employment and recruiting type-businesses are good. They also mentioned a couple of others that are important. Logistics, trucking, transportation, medical and nonmedical transport, tech businesses, food delivery, bread routes, all those types of things. Even IT and cyber security-type businesses that were strong in 2007, 2008, 2009 are coming back to the forefront.
Patrick:
Thank you, Keith. The next question we have, and I think now this is very pertinent one is: is now the right time to buy a business? Josh, would you go ahead and take that one for us?
Josh:
Yes, absolutely. Going into business for yourself is always going to be a passion for someone. Anytime really can be the right time. Right now, we’ve gone through a pretty wild time in the economy, and we’re hopefully getting out of it soon. I think there’s going to be some excitement with consumers. I think people want to get out and they want to spend money. I know that I do! I’m sick and tired of being at home. I want to get out. I want to do things and support my local economy.
So, I have a feeling that in the next couple of months, there’s going to be some good opportunities for people to really take advantage of this renewed economy. And people that are wanting to just go and again, it’s a passionate thing that you want to be a business owner. So, you can take advantage of the low economy now and what it could potentially be in the next few months. I think that it could be a really, really good time.
Patrick:
Cool, thank you. Those are some quick, short business landscape questions we have. Based on what I’m seeing coming in the Q&A section already, I think this will address a lot of those questions.
In this next section, we want to cover our state of SBA-7a, enabling lending questions. And there’ll be some of the stuff around down payments, and credit requirements.
First, one of the questions I know we get a lot as people come in looking to get loans and want to understand more is: are there businesses the SBA likes or favors? Ryan, would you go ahead and take this one for us?
Ryan:
Yes, thank you, Patrick. It’s a little easier to define what the SBA doesn’t like. On top of the list, there is anything speculative. So, gambling institutions, wild cattle for oil, that sort of thing. SBA doesn’t like those type concepts. What they want to see are concepts with a proven track record. What that looks like really shows with franchises. Franchises work great in that space because they have a proven history of several locations being successful. Business acquisitions are a big one as well because they can lean on those financial tax returns and the history that that business has performed in.
If you’re trying to start an independent concept, that’s also a route you can take with the SBA. In that scenario, the SBA is going to rely a lot more on your personal resume and your work history to show your track record as to why you’re the right person to do this concept.
Patrick:
Great. Thank you. Probably what people really want to know is: what the current requirements for an SBA loan?
Ryan:
Yes. That’s a fun one. Because unlike mortgages, there’s less of a rigorous box that you need to fit in for SBA. But a trend we’re seeing going into 2020, even pre-pandemic, is needing to have income. Banks want to see income from a source outside of the business you’re starting that, at a minimum, covers your personal obligations and your household obligations. They want to see that you don’t need to rely on the business to be able to support your family. They want to see equity in yourself. Much like buying a home where you need to put a down payment. Same with the SBA and a business. Typically, right now, we see anywhere from 20 to 30 percent down, as to how banks are wanting to receive files.
Another big piece would be collateral. So the SBA has told these banks that these loans need to be fully collateralized. Now the business council, they place a lien on the business, and that satisfies some collateral. Frequently we see banks also placing liens on personal property to satisfy that SBA collateral requirement.
Patrick:
And then, Ryan, I know sometimes we get a bit of confusion where the SBA has certain requirements, and then the lenders have certain requirements. Is there anywhere within this that you can clarify where people may read one thing, but when they get to a lender, they may experience something slightly different?
Ryan:
Yes, absolutely. Where we see the most variance in understanding is equity injection. From what I see, the files that come across my desk, the SBA tells banks, “Hey, you need to take a minimum of 10 percent down to do these loans.” Borrowers get really excited. They come to me and say, “Hey, I’m going to put 10 percent down on this business.”
That’s all well and good for the minimum standard by the SBA. But when we take these loans to the market, we find that banks require that 20 to 30 percent down range – a little over double what the SBA is saying they need to have.
Patrick:
What’s the FICO range you’re looking for, and then based on where interest rates are today, what kind of interest rate are people looking at if they did get a loan today?
Ryan:
The minimum FICO needed for SBA is 620. But much like the equity injection, that’s the minimum. We find that 640+ is usually where you need to be at, trending more towards the 700 range for your FICO. In terms of interest rate, most banks are going to price this at a variable rate with a spread over prime. The most common prime that we see today is 2.75 percent, prime is 3.25 percent today. So that would be a 6 percent interest rate. That would vary quarterly based on how the fed is changing the prime rate.
Patrick:
Okay. And then, Michael, I know you work a lot with the SBA loans with your clients. Is there anything else you’d like to be able to add to this?
Michael:
The SBA has been around since the fifties, and it’s evolved a lot. Right now, it is a very interesting time. And so, if you’re buying an existing business, that business has to stand on its own. You could be perfection on paper, and it’s not going to really matter. I think the biggest, most important piece I would throw out if you’re buying an existing business is to get really clear on what you’re buying. You need three years of tax returns, and three years of profit and loss statements.
Let’s evaluate that. Make sure it can afford to pay you a salary and have the capacity to pay the debt. That is absolutely paramount. And really, that should be your first step of due diligence anyway, before you get too much further.
The other thing I would add is not all banks play in the same sandbox. You’ve got the SBA criteria in underwriting, and then you’ve got the lenders. The lenders vary, so you need to know where to go. And a lot of these lenders might have specific requirements, geographic requirements. Some might have a threshold that they only do loans above a certain threshold. Maybe they prefer certain industries or those with assets. So having the ability to dictate which lenders are the best to go for certain businesses is pretty powerful. And that’s something that we run across a lot. People spin a lot of wheels, and then they come to us going, “Oh, geez, maybe this is a much better platform.” Our success rate is 96 percent or better if we’re behind it if we feel like we can do it.
Patrick:
Brilliant. Thanks for adding that. The next question we have is about how people have seen the Paycheck Protection Program (PPP) and Economic Impact Disaster Loans (EIDL). So, are there currently any incentives for starting a business? And these might not necessarily be the incentives we’ve seen for people who are currently in business from the SBA.
Michael:
Yes, absolutely. There’s a pretty big one. The SBA came out and said that anybody starting or buying a business right now, if their loan fully funds and disperses by September 27th, the SBA is going to make the first six principal and interest payments on your behalf. So, just because you’re looking to start or buy a business currently, you’ll get half a year of free loan payments.
This is another way that they’re trying to stimulate the economy and keep things going right now.
Patrick:
You kind of touched on it, but I’d love to get back to it again with the PPP and EIDL. What’s happened with standard money? What are the timelines looking like now, if you wanted to get a standard SBA seven-day loan?
Michael:
Yes. So, pre-pandemic, what I would tell most of our clients is to expect this process to take two to three months from starting the conversation to getting the money out of the loan. A lot of that is client-driven, so it’s based on how quickly you’re able to work through all the documents needed to underwrite your file. And then, when you’re approved, you get a second set of documents you need to do a closing checklist that you need to work through. For folks in the startup space, this is largely dependent on your lease negotiation, your site selection, how quickly you can get a landlord onboard, and get your site picked out.
Now with COVID-19, it does change some things because all the same banks are doing these startup or acquisition lending; they’re also facilitating that PPP program. Right now, we’re messaging about three to four months. So about another month tacked on just based on lender response time.
Patrick:
Next question, again, this is one you alluded to a little bit. We get this one a lot: why do I need income to get an SBA loan? My income will be from the business I’m starting.
Michael:
Yes, certainly a valid question. A couple of years ago, that was a strategy that worked, not having an income, being able to do a startup, and saying, “Hey, I’m going to drive my income from this startup.” Going into 2020, even before the pandemic, we saw banks shift. And the main reason was they were saying, “We want to make sure that the household isn’t stressed, and the business isn’t stressed. So, we want to see income from an outside source, typically a salary to be able to at least cover your obligations.”
So, your business cash flow wouldn’t be further stressed by you having to drive owner salary immediately. Now, the one exception to this rule would be a business acquisition. If you’re buying a business that has a proven track record of paying a salary, as long as it’s healthy enough to be able to both pay the SBA loan and a salary for yourself, that’s kind of the one rule where you could move forward without having that outside income source.
Patrick:
One question has come in that I think it’d be good to try to address, while we’re still on this topic, is: if you have received the PPP or EIDL for a different business, are you still able to get an SBA loan if you’re looking to acquire or start a different type of business than the one you received funding for?
Ryan:
That’s a great question. I would say that there are no blockers there. I haven’t heard of any disqualifiers for having a separate entity obtain a PPP loan. It seems like you’d be all set to move forward.
Patrick:
I think that had come down to Michael’s comment also. It’s all going to be based on the business and the strength of both.
Ryan:
Correct, yes. Good point. That’s global cash flow. Global. Everything’s global.
Patrick:
All right, so there’s plenty of questions to come in and around SBA. We’ll circle back to those as well once we get to the Q&A towards the end. But I do want to make sure we can get through some of the top questions we tend to get on a regular basis as we’re speaking to people.
So, next up are the questions we get around funding with retirement funds using ROBS. Some people here may know about this, but if you don’t, one of the top questions as people come in is: what is ROBS? Bill, would you mind taking that for us?
Bill:
Yes, thank you, Patrick. Also, I get who is Rob, and what is Rob’s last name? [laughter]
Right. So, ROBS stands for Rollovers for Business Startups. In short, it allows you to shift your investment strategy away from the stock market that you and I have zero control over. And you get to go over here and invest in your own corporation with zero taxes, zero penalties. You become the CEO of your own company. It’s you shifting away from buying Apple stock, and you get to come over here and buy stock in your own corporation.
So, the background of ROBS. This program has been around since the mid-1970s. It comes from an act called ERISA, the employee retirement income security act of 1974. You know, here at Guidant Financial, we’ve helped over 20,000 clients go down this path, even though most people have never even heard of this whole program. Our role is here to protect you, make sure the sandbox that we have to plan is coming together properly. And so for the ROBS program to be built out, we need to set up the proper entity.
There’s only one entity that can work. This particular entity will need to become a C corporation. So we build that for you. We set up your C Corporation, set up the EIN number, and then we go to step two, which is to build and customize a brand new 401k plan. So once we have the 401k plan custom built for you and your corporation, that’s where the C Corporation sponsors that plan. Once that legal structure comes together, it allows you to roll up to 100 percent of your own retirement dollars into your new 401k.
Once that’s happening, this is really where the retirement account is turning into your business partner, and your retirement account is now acting as your investor for your corporation. From the corporate side, you can’t just take that cash. You need to give something in exchange. Here’s the whole magic of the ROBS program. We need to create your private stock called QES, and that stands for Qualified Employer Security. So once we create this stock that can be getting in exchange for the cash, and that’s just buying, let’s say Apple stock, you become a shareholder, you’re an owner, you receive a piece of paper, it sits inside your own retirement account.
But when you buy Apple stock, that money goes over to Apple’s corporation, and they’re using your money to run and operate their business. So over here, you’re investing in your own corporation, that money goes into your own corporation and underneath your corporation has a bank of your choice where you set your corporate business checking account. That account now becomes cash-rich with zero taxes and zero penalties.
This is not a loan. This will be an investment to you and enter your particular business. And so really this is where you now become CEO of your own company, and so now you get to use those funds for the good of your project.
Patrick:
Thanks for that high-level explanation about ROBS, Bill. Would you mind elaborating on what type of retirement funds can be used for the ROBS structure?
Bill:
Great question. The retirement dollars have to be what we call “pretax qualified retirement accounts.” These would be your traditional IRAs, your previous 401ks. You can also use savings plans. 403Bs.
If you have a current 401k, typically, you’ll need to separate from your employer for funds to become available. I typically educate my clients that you should be reaching out to your plan custodian to capture more details and figure out what your options are. You could also have potentially what we call an “in-service rollover” option available.
Patrick:
Great, thank you. The next question we usually get a lot of is: what can ROBS be used for? Are there restrictions on how I can use this to acquire businesses? And Michael, would you mind go ahead and take this one for us?
Michael:
Yes, certainly. Thanks, Bill. Thanks, Patrick. This needs to be a for-profit business. We need to make sure that you’re buying something that you’re going to be able to physically touch and be engaged in. So, they’re going to expect if you’re going to do this and use these funds that you’re going to be an employee of said business at least part-time. Typically, the guideline is 1,000 hours in a year. So this means you can keep a job on the side to do this, but the business needs to be federally legal. It’s got to be an actively operating business that you’re engaged in. It’s got to be in the US – you can’t buy a farm in Nicaragua.
This is one of those things that has to be local. As far as the funds and how you use them, this could be used for deposits, for franchise fees, for buying the business, inventory equipment, working capital, marketing of your business. Whatever’s necessary really for the success of your business is appropriate. You’re not going to use it for buying that Porsche 911 because the vehicle is really cool. You’re not going to use it to pay your personal mortgage.
So, there’s a complete separation of personal assets and business assets. That’s the intention behind that. And you can pay yourself a salary as well from the revenue of the business. So, if it’s a new startup best not to pay a salary to yourself, you can use it to pay other people’s salaries if they’re your unrelated third-party employees. But if it’s you that you want to pay when revenue begins, not profit but revenue, then you can start paying yourself a reasonable compensation that your business can afford to pay you. So, the key here is that you have a fiduciary responsibility to your 401k plan and the business and that you’re going to do what’s in its best interest at all times.
Patrick:
Great. Thank you, Michael. One area of this question, I don’t remember if we talked about is: how can ROBS be used with other funding options as well?
Michael:
Yes, you could definitely use it as a down payment on an SBA loan or any kind of loan, really. I’d say that’s 50 percent of every client that we finance with the rollover program. They’re using it as a down payment on an SBA loan today. For me personally, I’ve helped architect over 700 businesses in three years. So that’s a lot of statistics to go off of. We see a lot of action, that’s for sure. ROBS is very, very versatile. Certainly, some nuances to know within that we can get more detailed and if there are further questions after this webinar.
Patrick:
Thank you. Now, next question. Bill touched on it briefly as to why and you talked about having a C Corp, but the question we get a lot of times is: why do I need to be a C Corp for ROBS? Josh, could you go ahead and take this on for us?
Josh:
Yes, absolutely. Michael, you actually can buy a Porsche 911! [laughter] I had a client that was starting a high-end car rental business Porsches, Lamborghinis. It sounded awesome. [laughter]
But yes, why do I need to be a C Corp? You have to be a C Corp mainly because you’re using your retirement dollars to buy stock, and only corporations issue stock. LLCs don’t offer stock. They have what’s called member units. S Corps, which are also popular, don’t offer the right type of stock that C Corps offers.
What Bill mentioned is qualifying employer securities or QES. which are only offered through the C Corp, and is the only type of stock that a retirement account can invest in. Thus, the reason why you need to be the C Corp moving forward and you’re just a private company. So it’s private stock. There’s no market for this stock. So it’s not out there. Not anyone can buy it. It’s your company. It’s your private company, your private stock. You’re the one that controls it.
Patrick:
Great. What usually comes with this question is: are there advantages of being a C Corp? Keith, would you go ahead and take this for us?
Keith:
Yes, I think I usually get the question of why would I want to be a C Corp or what are the disadvantages? But that’s changed quite a bit in the last couple of years. A lot of people starting a business set up or are told to set up LLCs or S Corp or sole profits with your pass-through or flow-through entities C Corps are not. So just like let’s say you buy Microsoft stock, you never see Microsoft paying your loan payments, you never see Microsoft sharing their profits and losses, write-offs, or deductions, because it’s not a flow-through entity. So there are quite a few advantages of the C Corp, and this is a good question to talk with a good CPA that understands C corporations.
There are benefits. There’s carry forward losses. Especially right now, two and a half years ago, if you remember, the government pushed through this corporate tax reform where C Corps were dropped to a flat corporate tax rate of 21 percent. So, I posed the question quite often to clients, you’re going into business and of course for all intents and purposes, you’re going into business to make good money.
And if you’re going to make good money, you probably will want to be a C Corp, especially as this grows over time. Whereas S Corps, LLCs, sole profits – all that flows through to you. You take a distributions’ income and those types of entities, and it’s going to bump you up a tax bracket or two or three. Whereas a C Corp, you can manage how much the C Corp pays in taxes after all write-offs, deductions, and salaries are paid out. So, you take a salary and a C Corp that the W2 wage, that’s a write-off to the business and then whatever’s leftover, it’s a flat corporate tax rate.
So, as the business makes money, hundreds of millions of dollars, or whatever it is, you’re at a flat corporate tax rate for the balance of the business.
Patrick:
And Michael, I know you probably have some thoughts on this as well, would you mind sharing what you think the advantages are?
Michael:
Yes, I think that Keith did a pretty good job. C corporations are powerful, and they completely separate your personal assets and your business assets. So, this is the strongest available protection that you’re going to get. So that’s one thing that I didn’t hear, but you’re going to want to work with a qualified CPA that understands C corporations, and you should also be aware that CPAs have specialties just like attorneys and doctors. You would never hire an intellectual property attorney to handle a real estate transaction. That’s just the same with a doctor and with a CPA. So, I think that’s something that should be highlighted here.
But one of the most powerful things here and Keith, I think he talked about it. I’ll elaborate a bit and say that small businesses usually have a little left in the way of earnings after salaries and fringe benefits there really paid out. So, controlling your taxation is really easy to do. It’s quite a bit more versatile than any other entity out there. But with that, versatility implies more complexity. So like anything else, assets can be liabilities if not managed well.
Having the right people on the bus becomes powerful and pretty important, which is why we step in. But we also want the CPA really to be stepping in on your behalf. They’re going to handle that and your strategy. There are several strategies you can deploy with C Corporations today, and three years ago, we didn’t have that flexibility. It was a really powerful change in the law.
Patrick:
Great. A couple of questions came in around this. I think it’d be really good to address right now. One of them is: if you already have an LLC, can an LLC and a C Corp work within the ROBS structure? Anybody on the panel who wants to take that one?
Michael:
A person can be running a business today and look for further capital. We didn’t talk about that when we were talking about SBA, but you can bring further capital into an existing business by using your retirement monies. There are obviously some steps. This is a good time to have a one on one conversation with one of us because there’s a lot of detail that goes into it. But in short, you’re bringing that entity in under the Corp as a subsidiary at the end I think there is a question or two that it’s going to come up, Patrick that you’re going to bring up.
We’ll talk about that a little bit that I’ll expand on. But absolutely, whether it’s an existing business now doesn’t have to be an LLC, could be an S Corp, it could be a C Corp, it could be a sole prop. There are ways to bring that in under the Corp through using the ROBs program.
Patrick:
Great. Another question to bring up now is: can I start off as a C Corp, get the money tax-free, and then later transition to an S Corp or an LLC? And how does ROBS work to unwind? So maybe Michael, do you want to talk about what it looks like briefly to unwind ROBS and maybe transition to a different type of Corp at some point?
Michael:
Yes, sure. You do have the opportunity to buy back the shares that your 401k owns. So what this means is you could take the excess revenue and profit of your business along with a partner’s money or another loan or an investor, or even combined all those funds together to buy back the shares and eliminate the 401k’s ownership. Once the 401k’s ownership is eliminated, then you can do a tax vocation. Change that to an S Corp or converted it to an LLC. However, you have to be fair about it. And it requires a business appraisal at the time you do it. That way, you’re not ripping off your plan. So there’s what we call adequate consideration. The appraisal sets the tone as an unrelated third-party appraisal to say what the value of the shares is. That’s the value of your business.
This dictates how many shares you can afford to buy back with that excess money you’re going to be using. So as the business grows in revenue and value increases over time, it could actually take more money to buy those shares back over that time. But you reap the benefit because that money goes right back to the publicly traded market in your 401(k). There are no taxes, there are no penalties. So, the answer is yes. You can exit out of ROBS. We can guide you through that. Sure.
Patrick:
Great. Go ahead. Keith.
Keith:
The only other comment I’d make on that, is that it’s a good conversation with them and their CPA because if they’re 30 years old or 40 years old, it’s likely that you’ll look towards doing a redemption or like Michael said a stock buyback. But if you’re 45, 50, or older, my guess is you would actually stay in the structure because there’s a really dramatic benefit on the backend also of being in the structure without having to pay all capital gains tax upfront when you sell. So more of a conversation with one of us.
Patrick:
Okay, great. Alright, next. One of the questions we frequently get around ROBS is, how long does it take to get funded with ROBS? Bill, would you go ahead and take this one for us?
Bill:
Yes, thank you. You know, usually, to educate my clients, I say it’s going to take right around four weeks for everything to come together. Ultimately, we’re going to be matching your momentum. We’ll go as fast or as slow as you want. We have dedicated fulfillment advisor that’s going to be holding your hand through the whole process, and they’re there to make sure that T’s are crossed, I’s are dotted. Some of the things that might slow it down or are out of our control are like the state of incorporation – where you’re filing. Also, where’s the money coming from? Is it being rolled from a certain custodian? Are the funds available in cash? Because ultimately, you’re going to have to have that cash available so you will need to liquidate those funds. But usually, I’m educating my clients that it takes right around four weeks for everything to come together.
Patrick:
Great. The next question we get a lot is: can I have a partner with the ROBS structure? Keith talked about it briefly, but Josh, can you go ahead and talk about this one a little bit?
Josh:
Yes, absolutely. And I think that the three others have alluded to it as well. When you’re creating the ROBS structure, you’re sort of creating a partnership anyways. You’re creating a partnership between yourself and your retirement account, which you own. So, it’s not a bad partner to bring on board. As Michael was talking about the potential of a buyback, a buyback of that stock, you can bring a partner in later on in the future, and you can have that partner buy back some of that stock if you want to start with a partner from the day one.
If you have retirement funds, if your partner has retirement funds, you can combine that all into this one ROBS corporation, your partner can also come in with cash as well. So you can bring on as many people as you would like. It’s entirely up to you because again, it goes back to it being your private company and your stock, and you’re going to be the one that controls who’s allowed to buy it. So yes, bring on folks if you need additional capital, if you want to do something with your (and a lot of people do this) husband and wife, spouses, brother, sister type of thing. Absolutely.
Patrick:
Thank you. The next question we get a lot is: what if I’m looking to open more than one business and or location? How does that work with ROBS? Keith, would you be able to address that for us?
Keith:
Yes. This is kind of where ROBS gets really exciting, in my opinion, for people to look at a long-term vision. We get this question quite a bit, by the way, with franchises where they come to us, and they are looking, okay, I’m going to buy a franchise. Well, what’s the long-term goal? Are you looking to buy one location? Whereas the goal is to open in a year, a second location, rinse and repeat, and go to the third location. And then, of course, I get clients where the husband wants to buy a business, but the wife wants to do something else.
So this ROBS structure using a C Corp certainly could run multiple businesses. The C Corp can have one, two, three half a dozen businesses within the Corp. Again, probably a good question with your legal or tax advisor, I wouldn’t do it that way. You could file separate DBAs or doing business as for each of those locations. But many times our clients will set up a separate subsidiary LLC under the Corp, typically wholly owned by the C Corp. So you eventually might have three, four, half a dozen different LLCs, all owned by the C Corp for multiple reasons, partly accounting reasons, primarily liability reasons to separate each business from each other.
And the nice part of that, if done correctly and properly, the LLCs are filed as disregarded entities. So you might have seven different entities in five, 10, 15 years, six LLCs, one C Corp. But the nice part of that is there’s only one tax return for the C Corp at the end of the year, but you’re still separating liability from each store location. So, if somebody came in and slipped and fell and sued you. That lawsuit would only affect one location, not the C Corp or any of its other businesses or assets.
Again, certainly good conversations to have with your legal advisor on how to structure it. There are some nuances like if you’re in California, that’s $800 minimum per year per entity. So, you have to factor in costs also. But it’s a great way to separate each business from each other or each specific franchise location from each other.
Patrick:
Great. Thank you for that answer, Keith. And the last question we have here on the ROBS section is: when do we start the ROBS process if somebody is also getting an SBA loan or they’re using ROBS as the down payment on the SBA loan? Michael, would you be able to speak to that one for us?
Michael:
Yes, sure. Context is everything. Some people have personal value systems that say, look, I want to use my rollover program to secure my territory for this franchise and pay my franchise fee. And that’s one way to go. There’s nothing wrong with doing that. The challenge with that is that hey, you still need that SBA loan, and we want to make sure we get that prequalified or pre-flighted and moved. So, a lot of people that might be more conservative would wait until they get their conditional approval on their other loan.
You have to have confidence in that deal first. Once they have that, then that’s the moment in time to start the Rollover for Business Startups program, as it takes at least 30 days just for them to close in the loan. But the lender is now asking for certain things like the C Corporation as an example, like the lease agreement, like the franchise agreement or, if it’s an existing business acquisition, the purchase, and sale agreement.
So, there are various things that we’ll need to collect, and it might include updated financials from the SBA lender. So we want to make sure that that we have the rollover program started so that you can actually close on your loan. In a sense, it’s being done in parallel, but the SBA takes longer. We would usually start with that first, get to a place of being confident, then we would get to that conditional approval and start the Rollover for Business Startups program. Unless, of course, you have a need for monies immediately – because sometimes opportunities wait for no one.
Patrick:
Great. Alright, well, that was the last of the standard ROBS questions we get. We do have some common questions, and we’ll get to the questions that have been coming in here throughout the presentation. So, one of the common questions we get is: should I be waiting for the markets to come back? Michael, would you like to speak to that one as well?
Michael:
Yes. Well, no one has a crystal ball. If we did, we wouldn’t be here. [laughter] So, this becomes you in the mirror test, really. You know, you have to decide if you keep your money in the market if your rate of return is going to be better than if you have access to the money and in control over the money in a business that’s in your domain of expertise. So a lot of people are going to realize that this is a very good empowering way to move. But if you look at statistics, if you look at the market, the S&P 500 (today I looked it up, and it’s what, 2,820 as of today). February 21st was at its all-time high.
It was peaked at 3,373. To break that down, it’s a 16 percent difference. The market today is 16 percent below its absolute top historical precedent in the SOP. This is all in lieu of 30 million+ people unemployed, six trillion-plus from the federal stimulus – which, by the way, is larger than Japan’s GDP. The fed slashed rates completely. There were fears of recession and market correction even before COVID-19 if you remember that in the media.
The real question becomes this: Do you really think the market’s going to continue to grow and exceed the top performance of what we had in February, in the S&P 500, in light of those facts?
And that’s a personal decision. I don’t know. I don’t think that’s likely. This is a really good time because the market has performed and come back quite a bit to where it was. The reality is that we’ve got a lot of variables in play, and this is an unprecedented situation. We’ve never seen this, a once-in-200-years event. But there’s a heck of a lot of opportunities out there. And I wholeheartedly confidently believe this is an absolutely great time to make a move.
Patrick:
Great. The next question we get a lot is around just helping people understand a bit of process. How long does it typically take to start a business? Josh, can you speak to that for us?
Josh:
Yes, absolutely. Every scenario is going to be a little bit different. If you’re using your retirement funds, it’s going to take a month, as Bill said, to get that structure put in place. If you’re looking to get an SBA loan on top of that, as Ryan said, another three to four months. So buying an existing business, the nice thing about that is that it’s a turnkey operation. Once you get your cash, you’re ready to go. You’re in there. You’re running the business on day one. Whereas something like a franchise, for instance, you’ve got to find your location. You’ve got to pay your franchise fee. You’ve got to build out your location. That could take four to six months. You’ve got to give yourself a little bit of a runway and some time to get to that point.
It really depends on what it is you want to do. Are you buying something that’s existing that you can just get in there and go? Are you buying a franchise? Is it your own startup from the ground up?
You have to give yourself some time, but in short, you’ve got to have the money in place. You’ve got to get the funding ready to go to make sure that you’re ready to hit the ground running when the time comes for you to open your doors and start generating the revenue that you’ve been hoping for.
Patrick:
Okay. Thank you. Now, the last and final question that is always on everyone’s mind is: what is the worst-case scenario? If things don’t work out as expected with ROBS or an SBA loan? We’ll start with ROBS. Keith, would you walk us through what happens if a business doesn’t work out, and you’ve funded your business with ROBS?
Keith:
I guess the easiest way for people to wrap their head around this thing (call us if you want further details) is if you went out and bought whatever the amount is $150,000 today of Microsoft or IBM or GE or whatever else is out there, that money or that the market drops we’d get a market correction. The company has terrible earnings, and they dropped 10, 20, 30, 40, or 50 percent in the stock market. That is an unrealized loss, or like Michael was talking about, the market has done great for an 11-year run. That’s an unrealized gain using the ROBS program.
Understand it’s harder to fail using the ROBS program because you’re starting with more cash typically and less debt. That’s one of the attractive features of the ROBS program: more cash and less debt, which forces your business down a faster path to profitability. But go down the road a year or two or three, and let’s say it doesn’t work out. You’ve got to bail out. Your business typically is not worth zero. You still have inventory and equipment. And let’s say a franchise territory you can sell off and a customer list.
So, you put in $150,000 on day one, and you fire sale everything for $75,000. You still have to put the $75,000 back in your retirement account and understand there’s no taxes and no penalties because, again, it’s an unrealized stock loss within a pretax retirement account. And it’s not like you started with $150,000 of debt, and you still have to come up with a way to pay off the debt without losing your home or damage your credit. Ryan will probably talk a little bit more about that too, but that’s what happens in a ROBS situation. It is an unrealized loss within a pretax retirement account.
Patrick:
Great. And Ryan, would you walk us through what happens then on the SBA side if a loan doesn’t work out or the business doesn’t work out?
Ryan:
Yes, exactly. If we’re talking pre-opening in your mid-SBA process and you need to walk away, or your acquisition doesn’t work, the great thing about our process is you would get your consulting feedback from Guidant, and you really haven’t lost any skin in the game.
Say it’s two or three years down the road, you’ve started your business, and things aren’t going as expected. You’re unable to pay back that loan. There are a couple of steps that would be taken. The first one is that the bank is just going to try to renegotiate payment from you. Their prerogative is to make the loan right.
They’ll try to stretch the term out, lower the payment, and generally try to find a way to become whole again. Now say you can’t, or you don’t want to renegotiate that payment. First, they’re going to try to make it right by going after the business assets, because they have a lien on your business. They’re going to sell whatever equipment, fixtures, furniture, and so that they can get that payment to zero and get that loan repaid. If the business can’t satisfy itself, then they can look at your personal assets as well, because part of an SBA loan is you’re providing an unlimited personal guarantee so they can look at personal cash accounts, your residences, depending on the situation and how long you’ve been in business for.
Patrick:
Thanks. That wraps the questions we typically had. Now we’ll go through and bring up some of the questions that came out as we’re going through this presentation. One of the ones I think is good to bring up goes back to the ROBS program is: if I move forward with the ROBS program, do you have to use your entire existing balance? Would one of you like to take that one?
Michael:
Yes, Michael, here. No, you don’t have to use everything you could use, just as much you wish to use. It’s completely up to you. You could decide to roll over everything and only invest some of that in your business. And the rest of it goes to the publicly traded market, or you could just use some of it and leave the rest where it is.
Patrick:
Great. Another question that came in is: how do you determine the value of a business? Bill, would you mind taking that on for us?
Bill:
Sure. So with the ROBS program out of the gate, it’s straight forward. It’s based on where the cash came from and how much cash was delivered to the corporation. Typically, you’re going to have two business partners. Your retirement is going to act as one partner, and then your personal cash will act as the second business partner. So out of the gate, if you rollover $90,000 and you bring 10,000 of personal cash, then your corporation will be worth $100,000. There are two shareholders, it’s you, and your retirement account, which represents 90 percent ownership and the personal cash you brought represents the rest, the 10 percent.
Patrick:
Okay. One question that came in multiple times is: how does ROBS works? And maybe it’s under the prohibited transaction concept with a home-based business. So, the difference between if you’re looking to buy or start a bed and breakfast with ROBS versus if you’re just running an e-commerce website out of your garage. Could you describe a bit about what those funds could be used for, and what they can’t and those types of scenarios? We’ll go with Josh and then maybe Keith if you want to jump in on that one as well.
Josh:
Yes, that’s a good question. And that’s something that comes up pretty often. You can work out at your house, by all means, use the ROBS funds to buy the equipment and supplies and everything you need to get your business going. The only thing you shouldn’t do is you shouldn’t use the corporation to pay your mortgage. It shouldn’t pay all your bills. It’s not your personal money that should be spent. It’s the corporation’s money. So, if you want to use the barn that you have in the back of your property to build woodworking, or have a woodworking business, build tables, chairs, shelving, things like that, by all means, work from home. You don’t have to lease a place!
It saves you some money. It saves the corporation money. Just don’t use the corporation’s money to pay your personal expenses to work from there. Something like a bed and breakfast requires 24/7 management. So you’ve got to be there. You can use your funds to buy a bed and breakfast. You can reside at that property. You’re managing that property. You’re required to be there. So whether it’s going to be you or whether you’re going to pay a manager to take that role, that’s entirely up to you. But yes. Great question.
Patrick:
Keith, anything you want to add to that one as well?
Keith:
I would only add the other couple of things. When people start looking at businesses, you couldn’t buy a Subway and put a cot in the backroom and live there. That’s not a required component of that business, but as Josh said, campgrounds, RV parks, a bed and breakfast, inns, 24/7 horse boarding, and dog kenneling type-facilities. You’ve got to pay somebody, and that person can be you. It just has to be a reasonable part of your compensation.
Patrick:
Great. We’ll have Ryan answer this next question. There’ve been some questions around the collateral requirements for SBA loans. Does it always have to be your house? I know there are sometimes different ways in which you can have something collateralized in order to get an SBA loan. Could you walk through a little bit about that for us?
Ryan:
Yes. Good question. So I guess first off, there is no hard rule that you need to be a homeowner to get an SBA loan, regardless of the size of the loan you’re shooting for. But if you do own a home, then there are a couple of things to consider. So, if your SBA loan size is $350,000 or higher, the banks have no discretion. The SBA has said, if the client owns a residence, you place a lien on that residence. So, any property you own in the United States, a lien will be placed on it when your loan size is $350,000 or more.
Now under $350,000 is a more interesting area where banks are not mandated to place the liens on your home. We see, especially amid the COVID stuff and banks being maybe a little more conservative than they were last year, that most times, they’re still going to place liens on your residence. Call it 80 percent of the time, so if you have a home, they’ll place a lien on it, but they do have more space to play in when your loan size is under $350,000.
Patrick:
Okay. We have time for one more question.
If you had a question and we couldn’t get to it, we’ll make sure to have somebody reach out to you to get your question answered for you. I put out a poll if you want to be contacted to get more questions asked. Also, right now, if you’re interested in what’s next, you can give us a call. We’ll help and get you scheduled. You can go to our website and sign up there to talk to one of our experts here as well.
Or if you’re interested, we also have a great Learning Center. We’ve got a full guide to how ROBS works, guides to SBA loans, guides to franchising, and a lot more. So, if that’s more your style, you can go ahead and check out some self-education on our Learning Center. And then when you’re ready, if you do have additional questions, we’re always there to reach out to you.
Before we go ahead and wrap this up, there’s one question I do want to make sure to try to answer. Maybe it’s one of those questions that’s best discussed also on a call with one of you guys, but the question of C Corp and double taxation came in here a lot. Would one of you want to address that question or concern?
Keith:
Double taxation is a true statement, but probably the most misunderstood point for most of the clients I’ve talked to. Most clients think the business is going to get taxed and then pay the owner a salary, and the owner’s going to get taxed. That is 100% false. We’ve got some great education on our website for that. We can speak to it if you have a consultation with us, too.
The only time that C Corps are double-taxed is if, during the course of the business, you decide (which can be a great tax strategy, and a great way to stuff a bunch more money in your retirement account every year without that $19,000 or $26,000 limitation) is a dividend payment. But the dividend payment is after the C Corp pays tax. Then you pay a dividend payment, and the dividend goes to all shareholders. Most of our clients, personally, they are a small percent shareholder. Their retirement plan is usually the majority shareholder. So, you get the bulk of that dividend payment.
With other tax situations, talk about with either your tax advisor or give us a call we can answer some basic questions.
Patrick:
Great. I want to thank you guys all for being here, walking through these questions.
We want to be a resource to help educate you on your path to starting or buying a business where you’re looking to do. Thank you, everybody, for joining us.
