Utilizing Your Retirement Funds To Buy A Business

Turning your retirement funds into tax-free funding to buy a business is now an option many California business buyers utilize to fund a small to mid-sized business purchase. When I chat with business buyers about their search strategies,  or their  BizBen Power User account, I find many potential business buyers - especially buyers who are buying "bigger" small businesses and they need a substantial down payment, many are turning to this strategy of utilzing retirement funds.

Although thousands have discovered this unique opportunity, some of the savviest buyers are still unaware of this remarkable funding option: You can utilize your retirement fund monies before retirement age to purchase a business without incurring early distribution penalties.

Thanks to the government’s 1974 ERISA laws, you can self-direct your retirement funds into investments that include buying a business and/or franchise. Have your eye on a corner taco stand? Thinking of turning your love for animals into a pet-grooming shop? Funding your dream enterprise with retirement monies is a dynamite option for those wishing to take control of their future by going into business for themselves.

The Benefits

While individual retirement account (IRA) funds could be used in this way for the past three decades, it’s only been in recent years that people have taken a closer look at personally controlling the investments made by their IRAs both in and out of the stock market. More specifically, an increasing number of new business owners are enjoying the benefits available to them through what are commonly known as “self-directed IRAs.”

By using an IRA structure similar to that of a self-directed retirement account to purchase a business or franchise, you can save money, increase your retirement account value, and even offer a 401(k) to your employees. It’s ideal for those who want to avoid taking out loans to finance a start-up business. Or, if your retirement funds can’t cover the full purchase price, the structure allows for multi-party purchases – a perfect set-up for husband and wife teams. You can even combine your retirement money with loan money. All these options allow you to start your business with significantly less overhead, which translates into greater profits.

For example: To finance a $200,000 business, a 10-year 10.75% SBA loan could stunt your growth for the first 10 years. However, a similar business funded with retirement monies would not be subject to debt payments. Thus, the over $2700 you would be paying monthly on your loan could be reinvested instead into your business to increase your growth rate.

It Gets Better!

Using retirement funds to finance your entrepreneurial endeavors could mean much higher returns within your retirement account, since company profits not expended on loan repayments can be deposited back into the account. In this way, your retirement nest egg grows along with the success of your business. Profits funneled into your retirement account are tax deferred, just like earnings from traditional stock-market investments. Over time, this could save you thousands in tax dollars.

These self-directed account structures provide a surprising amount of flexibility. Plans such as these allow for investments into new or existing businesses. Other plans are structured to allow for investments in real estate, vacation rentals, hard money lending and much more. Into real estate flipping? You could combine your interest in real estate with your desire for self-employment by forming a Real Estate Operating Company (REOC). Want to invest in shrimp farms in New Orleans or timberland in New Zealand? With the right self-directed account structure, you can do that, too.

Getting Started

Restructuring your IRA (or other retirement accounts, like 401(k)s) to allow for a business or franchise purchase is best left to professionals experienced in such matters. While no taxes or penalties are triggered in transferring the funds from your old retirement account into the newly created one, the IRS does have the right to tax up to 100% of your IRA value if you fail to follow the appropriate government guidelines. For this reason, you will want to employ the services of retirement account facilitators who have structured hundreds (and preferably thousands) of these accounts successfully.

Although an increasing number of investors are discovering the value of this business-funding option, there are still only a handful of companies that specialize in creating these unique accounts. Many offer free consultations and will explain in more detail how the structure works in relationship to individual business goals. Do your homework, and don’t be afraid to ask questions. Remember, it’s your money and your business.

Financing a business purchase with your own retirement funds takes the anxiety out of this first step in business ownership . . . and it puts you on the fast-track to greater success when needing capital to buy a business.

Posted on April 22, 2008  |   Email This Blog Post   |   Print This Blog Post