When you fund a startup using a Rollover as Business Startup (ROBS), you’re investing your hard-earned retirement funds into your small business. However, like with most investments, the time may come for you to exit the business and move on. The ROBS structure allows business owners to sell or close their businesses, but a few important steps must be followed. By following the proper exit procedure, you’ll make sure to avoid penalties and fines from the IRS and wrap up your investment successfully.
Selling your business
Before selling your business, you’ll need to have either a business appraisal or valuation conducted. This will determine the value of your business today and will set the value of your company’s stock. An appraisal or valuation should be conducted by a third party and be based on accurate financial data from your business. This value can be used to give context for your asking price when you sell.
ROBS-funded businesses can be sold through either a stock or asset sale. The sale method you choose may depend on your and your buyer’s needs and interests.
Stock sales involve the sale of the stock shares you hold in your business. The buyer purchases an ownership interest in the legal entity, with the company, employees and operations remaining intact. Each shareholder in the company will receive a portion of the proceeds from the sale. Your retirement plan will also be a shareholder and will receive a portion of the proceeds, which you can roll into an IRA after leaving the business.
Asset sales involve the sale of the company’s physical assets. This does not include the corporation itself. An asset sale may or may not include the company’s customers, contracts or other intangible assets, depending on the details of the sale. The proceeds gained by the sale are used to pay off liabilities held by the company. The remaining proceeds are distributed among the owners of the company. If you have not dissolved your ROBS structure before the sale, then your 401(k) plan will still be an owner in the corporation and will receive a portion of the funds.
Exiting the ROBS structure
If you plan to close or sell your business and need to dissolve the ROBS structure, you cannot just hang up a “closed” sign and walk away. There are a few steps you need to take to exit ROBS entirely. Most importantly, the IRS must be notified of your intention to sell or close your small business. This is because the retirement account involved in the investment must be accounted for.
The most important thing to do when selling a business funded through ROBS is to stay in contact with your third-party administrator (TPA) and your tax attorney. As the manager of your ROBS account, your TPA will be able to guide you through the process and ensure all necessary forms are filed. Your tax attorney will provide counsel on any tax forms you’ll need to submit.
Under the ROBS model, a C-corporation is funded when a 401(k) plan purchases shares of stock in the business. In order to exit ROBS, those shares must be redeemed. The business must buy its shares back at the current fair market value determined by a business valuation. The value of the stock is then deposited into your (and any eligible employees’) 401(k)s. Any additional assets held in the retirement plan also need to be rolled over or distributed from the plan.
Once your 401(k) plan’s assets have been distributed, you will need to file a final IRS Form 5500. This step will ensure that the IRS considers your plan officially terminated. Your TPA will help you fill out this form and submit it according to IRS regulations.
Too many business owners ignore ROBS exit strategy steps or wait too long to begin the process. By working closely with a TPA like Tenet Financial Group from the start, you’ll be able to navigate the ROBS structure while your business is in operation and as you prepare to sell. Contact us today to learn more about ROBS.