ROBS and QSBS · Searcher School

ROBS and QSBS

There are two very key strategies that you could use in business acquisitions that, if you are not familiar with them already, you should definitely look into and understand:

ROBS (Rollover as a Business Startup): This allows you to roll your 401Ks / IRAs into a new retirement plan and tie it to a C-Corp, penalty free. The newly formed C-Corp issues shares that the retirement plan "purchases" in exchange for the cash. Then, your funded C-Corp can go and acquire a business with an SBA loan. This rollover, when executed by the proper specialist (for example, a company called Benetrends), is penalty free. This means, you don't need to cash out your 401K in order to access funds to acquire a business. It's important to notice that C-Corp "belongs" to your retirement plan (not you), and it can only be used for "active businesses" (no passive investments). Proof of an active business typically requires income in the form of a salary or management fees. This is a great way to access liquidity if you have old 401Ks that you can tap into
QSBS (Qualified Small Business Stock): This is wealth building on steroids. You form a C-Corp and use it to acquire a business. At formation, the C-Corp issues shares in exchange for the the equity you put to acquire the business (for example, your down payment, investor's funds, etc.). As you grow the company, the valuation increases, and so does the value of the shares. The government allows QSBS shares to grow TAX FREE up to $50 million. There are even advanced strategies in which you can create trusts and gift shares to your relatives (e.g. your children) so that it expands the QSBS limit. The stock has to qualify in order to be declared QSBS. Typically, active businesses qualify (no passive investments). Hence, if you roll up a bunch of companies and exit to PE in a few years (a.k.a "the dream"), you could potentially cash out $50 million tax free.

Now, it's important to understand that a ROBS C-Corp does not qualify for QSBS. So investors usually create separate C-Corps or create a C-Corp that holds both retirement funds and personal funds. The personal funds qualify as QSBS and the ROBS part does not. Still, once you sell the companies, the ROBS exit could be tax free too if you used ROTH funds.

Happy searching!

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