Most aspiring business owners naturally have an optimistic outlook on their business prospects. In fact, this self-belief can be a key ingredient to the ultimate success of the business. While it may run against their “glass half full” nature, prudent entrepreneurs should consider the possibility that their business plans will fall through.
Virtually every business plan will have a certain amount of uncertainty and risk. For example, you may have found a promising opportunity to purchase an existing business but not yet completed the due diligence.
For those who intend to use a 401k to start a business or finance a business purchase but are not 100% certain that the business plans will materialize, they may be hesitant to incur the expense of a ROBS transaction which ranges from $4,000 for our 401k Business Financing plan (see our 401k Business Financing Pricing) to almost $6,500 for other ROBS providers (Compare Our 401k Business Financing Plan).
To address this concern, some ROBS providers will offer a “money-back guarantee” that provides that the fees to set up the ROBS transaction will be refunded if the business plans fall through.
While this approach may be appealing for a cost-conscious entrepreneur, it may not be the best practice from a compliance perspective. Setting up and then shutting down the 401k shortly thereafter could present a compliance risk and draw regulatory scrutiny as to whether the permanency requirement applicable to all 401k plans was satisfied. For this reason, rather than taking a “money back guarantee”-type approach it would be preferable from a compliance perspective to take a phased approach. For example, in the first phase we would establish the corporation, obtain an employer identification number for the corporation and start drafting the 401K documents. In the second phase, the 401K would be finalized and adopted by the corporation, & the funds transferred and ultimately invested in the business.
This phased approach presents several benefits. First, a corporation will be established which can be used for purposes of making the offer, drafting the franchise or business purchase documents, etc. Second, if the deal falls through the 401k would not have been formally established. Not only will this make it easier to unwind the deal, but it also reduces compliance risk as you will not have set up and then shut down a 401K plan which could draw regulatory scrutiny. Finally, under the phased approach we will charge our fees in a phased manner (specifically 50% upfront and 50% when you decide to proceed to the second phase) such that if you never proceed to the second phase you will reduce costs.