As Seen in NNBW: Buzz Harris: How to use IRA or 401K retirement funds to buy a business

Two of the largest groups of buyers who are purchasing businesses in the Truckee Meadows are investors and career changers.

Because of the recent volatility of the stock market and corporate corruption, many investors have realized that as a business owner the return on their investment can be significantly greater when successfully operating their own companies.

Career changers are former middle managers and executives who have taken early retirement packages and are eyeing the advantages of being in business for themselves.

Today, more and more of these types of buyers are using their IRA or 401k plan money before retirement age to buy a business without incurring penalties.

As real estate equity has diminished and lending standards have tightened for more Americans, they have found it increasingly difficult to secure the funds to either purchase a business outright or finance its acquisition.

When buyers use these funds to buy their business, it is like buying a publicly traded stock except the privately held business becomes an investment held in the 401k plan.

The buyer’s first step is to have a customized C corporation established, which then sponsors a specially designed 401k plan designed to allow for investment into their new corporation.

The next step for the buyer is to move their existing retirement funds into the new 401k plan. The new 401k plan then purchases stock in the new corporation. At this point, the new corporation now will be able to buy a business.

Sound confusing? It’s not but restructuring a person’s retirement account to allow for a business purchase in this manner requires the services of a professional skilled in this area.

The benefits of tapping into a retirement fund to purchase a business are numerous.

For starters, since this is structured as an investment into a business and not a loan, there is no debt service that can increase the buyer’s overhead. The savings can be reinvested into marketing, staff, equipment, etc., to help develop the business further.

It also can allow for the buyer to offer a 401k plan to his or her employees, which could mean more loyal, dedicated, and motivated employees to help ensure the businesses success. And finally, these funds can potentially be leveraged with either traditional bank or seller financing to allow for the purchase of an even larger business.

See full article here.