Back in 2012 when I was writing Transaction, my New York Times blog, I wrote a post exploring the pros and cons of a little-known way to finance the purchase of a small business: rolling over funds from your 401(k). Since then, I’ve seen business buyers use what are called ROBS (Rollover for Business Startups) more frequently. Business brokers have known about this program for a while, but business buyers now seem much more familiar with this particular tool in the overall funding toolkit.

One of my favorite comments on the New York Times post came from Tom Gazaway of LenCred, a provider of unsecured business loans with offices in Blackwook, NJ and Bentonville, AR:

Great piece Barbara. Not only informative but I think you covered the risk side of these transactions as well. We all know that if the banks were handing over lots of approvals that the need for ROBS may not be “as great” but there’s still a need. There’s definitely due diligence requirements when you risk your nest egg but I like how the guy from Guidant put it and I agree that as an entrepreneur I would rather invest my money with myself than with other businesses. Still a risk but entrepreneurs have been “all in” for a long time and ROBS offer a great option for the right people. Thanks.

I encourage you to read the post and check out the comments thread if you’re considering using your 401(k) to buy a business. The two main providers of these funding options are Guidant Financial (ROBS) and DRDA (BORSA).

There’s no doubt that any type of financing used to buy a small business is subject to risk — whether it’s your home equity, savings, loans from friends and family, or retirement funds. When I hear that someone “cashed out” their retirement to start or buy a small business, I wonder if they were unaware of the ROBS method — sometimes called a self-directed 401(k) — which avoids the taxes and penalties associated with early distributions.

Here at Allan Taylor & Co. we are always happy to offer our thoughts and suggestions on financing a small-business acquisition. If you’re a buyer trying to line up your funding sources, you may want to consider using your 401(k) to buy an existing business.

As always, feel free to contact us about buying, selling or valuing a small business. We’re ready when you are.

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Author: Barbara Taylor

Barbara is co-founder of Allan Taylor & Co. and a former New York Times blogger. She has been a small-business owner since 2003. Barbara lives with her husband, Chris, and their two sons in Northwest Arkansas.

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