What are the Pros & Cons of using a ROBS?
Posted 3.24.2021 in ROBS
The ROBS (acronym for Roll Over Business Startup) has been successfully used by entrepreneurs to fund business/franchise purchases and expansion for many years. Unfortunately, new businesses often have a difficult time obtaining financing because they have no operating history. The ROBS therefore becomes a viable funding option for many entrepreneurs starting or expanding new businesses. As is the case with many funding strategies, there are always pros & cons to consider.
Proswhen considering a ROBS:
- A ROBS is an established, process-focused funding strategy successfully used for many years
- You have access to your retirement funds free of taxes and penalties
- While traditional bank loans involve a credit check, there is no credit check required to set-up a ROBS and use your retirement funds
- Traditional loans require payback of principle and interest – adding additional strains to cash flow
- Investing in yourself and your business can diversify your risks away from traditional, and potentially volatile, equity and debt investments
- Less risk to personal assets because you are investing your own funds vs. using debt which often requires collateral
- Opportunity to increase the value of your retirement asset.
- In a down market, you can avoid market losses if the ROBS is increasing in value.
Conswhen considering a ROBS:
- Retirement funds are out of the market, so in a rising market you miss out of the growth
- If the business fails, you risk losing the retirement savings invested in the ROBS
- The business must be a C Corporation which requires double taxation, and has more restrictions and limitations because the business is financed with qualified funds
- Managing a ROBS includes recurring administrative duties and fees – and they tend to be a little more expensive to operate
Deciding whether to use a ROBS to fund your business/franchise acquisition involves considering many of the tradeoffs listed above. Speaking with experienced advisors who thoroughly understand these tradeoffs can facilitate the decision making process, but ultimately you need to decide whether the ROBS works for you and your entrepreneurial opportunity.
In this series of blogs related to ROBS, we will discuss:
- Why use a ROBS to fund your business purchase or expansion
- The pros/cons of using a ROBS
- The process of setting-up a ROBS
- Ongoing compliance requirements
- Exiting your ROBS
If you have set-up a ROBS and you are looking for expert tax/accounting/payroll support for your ROBS, please contact Attaway Linville today at 803-831-0263 or 404-607-8400 to learn more about how we can help.
This is #2 in a series of blog posts about ROBS. Click below for the other entries: