ROBS Issues Part 2

I’m doing a follow-up to our last ROBS feature article in order to clear up a few issues since I’ve finally had the time to put our thoughts down on paper.  Hopefully some of you find this feedback useful.

ROBS Background

To start with, realize that if you’re using a ROBS, you are creating a Class C Corporation because only they can have 401K’s.  You need a 401K to invest in the corporation’s stock. Issuing stock gives you funding to buy your business.  By definition, you’ll need income statements and balance sheets to support your tax and 401K filings.  This means you will be following GAAP rules for those financial statements.  You will become an employee of your new corporation. Although not required, a payroll software would support the income and wage taxes you will need to file as well as any health, dental and retirement benefits you decide to offer.  The payroll package needs to interface with the 401K filings.  I’ve been in finance for over 30 years and even I find these things complicated.  But they are all necessary because of the choice of using a ROBS.

Get thee some software

If you’re thinking of starting or buying a business or even for your own personal finances, get a checkbook package.  Many come with features that also let you track investments and more importantly. Some automatically capture the daily transactions from your financial institution.  That means you skip the data entry and only have to classify each transaction.  If you’re interested contact Bill about what we’re using and how you can customize one for business needs.

Software benefits

Bill understood how to cobble together an income statement and balance sheet because of his operations and financial reporting background.  We use it for the business and for our personal finances  This day and age, a spreadsheet or even a paper checkbook is no way to approach making intelligent decisions about your business.  Take applying for the new PPP loan, for example.  You need to know how much you spend on payroll, mortgage interest, rent and utilities.  That’s a simple software report.  But even outside of a business, are you considering a job change?  The software helps you see where you’re spending your money and helps you decide how to budget. It’s useful whether you’re making more money or even less money in the new position.  There’s simply way too much upside and absolutely no downside to prevent you from using a package.

Safety first

The minute you consider using a ROBS to finance a business purchase, put it into safe investments. Do not expose it to market fluctuations.  Realtors, our accountant and our lawyer have stories about people that were planning on using a ROBS and who delayed or even postponed their transactions because of the market downturn.  There is nothing worse than giving up on a dream.  You control the investments so this is entirely within your power.

Understand the 401K rules

I researched the withdrawal timing rules for my 401K when we got interested in a ROBS. I knew I didn’t have immediate access to the funds.  What I overlooked and what could have really come back to bite us was the withdrawal rules themselves.  My plan prohibited partial withdrawals and I didn’t need or want the entire 401K balance for the ROBS transaction.  The representative was very nice, however, and recommended that I just roll-over the entire balance into an IRA. We had been doing just that separately for Mary Ann’s multiple jobs to make tracking and maintenance easier.  This took a couple days to complete and since we weren’t working on a tight schedule it ended fine.  But it was unexpected because of my assumption from not being thorough.

Value is in the eye of the beholder

When we were buying the B&B our realtor asked me “How much do you want to pay?”  Puzzled, I looked back at him and asked “Well, how much is it worth?”  Realtors are great but you need to realize that they’ll be happy to let you overvalue something because they make more money on the sale.  You need to either do the math or have someone help you determine the cash flows and rate of return.  And your starting bid is important, because no seller is ever going to counter with a lower number than your initial offer.  We bid on a couple properties and for one of them the seller had a very different idea of value than what we thought the numbers supported so we walked away from it.  It’s a business decision and treat it as such.

Budget? Yes!

I laugh because I sent our accountant a draft 2020 budget when he was doing our taxes in February.  Of course that’s all gone out the window now because of COVID and travel restrictions.  But the important thing is that you need to have a plan and a back-up plan.  For those without experience, it’s going to take a while to get good at budgeting but DO IT!  For personal and business, follow your spending habits and learn where you can cut when necessary or splurge when you have a windfall. 

Have a plan

Discuss contingencies with your spouse or business partner.  Mary Ann and I literally discussed what we’d do as a back-up plan for funding if something major failed at the inn. Within a month COVID hit and we were using our back-up plan for operations funding.  As we’re all learning, it’s easier to respond to a situation when you have a plan than to have to make one up as you go along.

Wrap it up

Nothing of what I’m laying out here is proprietary and much of it is common sense.  More importantly for me, it would have been nice to have a friend to discuss these issues during our transaction.  Bill’s not claiming to be an expert, but he’s happy to lend a friendly ear and thoughtful eye for anyone that wants to talk about these issues.  Otherwise, it’s been fun giving you some insight into our journey to becoming innkeepers.