How to exit ROBS plans

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Video Transcript:

Hi, did you use a ROBS plan to purchase your business? ROBS is an acronym that stands for Rollover for Business Startup. It’s when you use retirement funds to purchase the stock of a new business. Now sometimes you’ll find that that is one of the only ways to make that purchase happen and that’s okay. But you will find, once you’re operating under the ROBS structure that it can be quite restrictive. There are not a lot of tax creativity items that can be used. And it also limits your ability to access the cash that is generated by the business. So at some point you may look at your structure and decide, Hmm, wish I could get rid of that Rob’s plan and operate as a another entity structure or operate in a different way. So I want to talk about how you exit a ROBS strategy. First off, the law says, did you have to purchase the stock back from your 401k at its current fair market value?

Now obviously current fair market value is a very subjective term. So how do we determine that number? Well, the best way to have good solid documentation in case you’re ever questioned by the IRS or the Arista folks at the Department of Labor is to have a business valuation. We do those types of valuations to help our clients exit ROBS when it’s appropriate for them. Now a business valuation will cost you a couple thousand dollars anywhere in the neighborhood of about three to $8,000 probably just depending on the size and structure of your business. Now when we do that valuation, we are aiming for a low number. So in this case we want to make sure that we are taking into consideration all the potential pitfalls and liabilities that exist in the business. Now normally we’re aiming for a high value when we do a business valuation, but this is one where we aim for a low value.

That low valuation will allow us a lower stock price to buy back the stock. Now we’ll need to figure out where those funds will come from because it does need to be a legitimate transaction to buy that stock back. If you are in a situation where your business has not been doing as well as you’ve planned, maybe it doesn’t is not currently profitable, maybe it has never been profitable. Or if you’ve put a lot of money into improvements and not yet seeing the results of that showing in your income, you may be in a really great place to exercise this type of strategy and exit the ROBS plan because your valuation will be lower. Now we do cases at times where the value is below zero. You would actually have to pay somebody to take the business off your hands based on the fact that you have more liabilities than you do value in the business.

So in that case, the stock that I use actually zero and we can exit the ROBS plan without having to exchange cash. However, you want to be careful and make sure that you use a true certified value so that you can make sure you have good proof and evidence and there are no problems later on in looking at how that structure was utilized. Now, if you do have the exit strategy in place and you’re ready to exercise that buyout, you will need an attorney to draw up the documents for you to help you exit the, and perform that buyout in a legitimate fashion and make sure that all the documentation is appropriate for your corporate minutes book. But we can help guide you along the way. Once you’re exited from the ROBS strategy, you will see that you will have a lot of other opportunities to exercise some tax creativity. So if that is something you’re interested in, I would be happy to talk with you about how we can help you make that happen. Thank you very much. I’m Donna Bordeaux with

Donna Bordeaux, CPA with

What happens when you send two CPAs out into the relaxing outdoors to camp? You get  Donna and Chad have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.  They camp and travel across the country every chance they get, so it’s just a natural fit that they focus their CPA skills on helping campground owners throughout the USA grow their businesses and minimize the impact of taxes.  They understand the key performance indicators and specialized issued that face RV park owners every day.

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