In 1997, I worked with a sophisticated purchaser that used an “exotic” transaction structure to acquire one of my client companies. Although I was initially skeptical about the process, after several conversations with the purchaser’s legal team and some additional research, I was convinced that the technique was valid. Our featured article this month, which is written by Larry Carnell, describes the structure that has evolved over the last several decades. Earlier this year, I attended an industry seminar and heard Larry speak. I was impressed by Larry’s understanding of the strategy and invited him to submit an article for us to share with our subscribers. Larry is affiliated with Benetrends, one of the leading firms in the industry. Although not for everybody, this is a strategy that can be deployed under appropriate circumstances.
How to Have the Government Assume up to 50% of the Cost of Acquiring a Business
Historically, there have been a few options to fund a business. One can either borrow the money and/or use personal savings. In rare cases, some may have a rich uncle who may help fund the acquisition of the business. However, most of us have historically believed they do not have a rich relative or uncle, but in actuality, many of us do… his name is Uncle Sam. If you have retirement funds, there is an innovator program discovered by Benetrends Financial more than 35 years ago that has become one of the fastest growing forms of funding in the country for business acquisitions. Best of all, it reduces the risk of funding a business by having the government assume up to 50% of that financial risk.
This innovative program is called the Rainmaker plan and allows people to use qualified retirement funds tax-deferred, penalty and debt-free, to start a business. It can also be used in combination with other traditional forms of funding, including cash or SBA loans, to buy bigger, better businesses. The Rainmaker plan is not a loan. It is actually a program that allows you to invest into the stock of your own company, similar to other types of retirement plan investments. The process encompasses several steps:
A C Corporation is Established.
The Corporation Adopts a Company Retirement Plan. There are many types of retirement plans. Each type of retirement plan has certain features, benefits, and risks. In recent years, there have been several shortcuts that have allowed people to access their retirement funds through a simple 401(k) vehicle. While technically determined to be legal, some of these 401(k) mousetraps exposed clients to significant consequences, including tax and other hidden traps. While Benetrends designs several types of plans including 401(k), they do not recommend the simple structures for C corporations because of these potential problems. As such, they design custom plans designed to allow people access to the retirement funds, while avoiding many of these consequences.
Client Rolls Their Existing Retirement Funds into Their Newly Created Company Retirement Plan. The retirement plan is then directed to use part or all of those funds to invest or purchase stock in their company.
Finally, the Invested Retirement Funds (Now Sitting in the Corporate Checking Account) Can Be Used for Any Legitimate Business Expense. These expenses can include buying furniture, fixtures, and even paying the shareholders a salary. If properly structured, it can also be used as a down payment for a larger business acquisition with SBA or other bank financing.
There are many short and long-term advantages:
Reduce Debt, Shorten Time to Profitability and Improve Cash Flow. Since this is an investment and not a loan, there are no loan payments and no interest payments.
Better Protection of Wealth. Businesses started strictly with cash or a bank loan, regardless of whether it’s incorporated or not, are considered personal assets and subject to seizure by creditors. When a business is structured through the Rainmaker plan, the business assets and income can be better protected by a law enacted in 1974 against personal liability risk and potential seizure. The fastest-growing erosion of wealth is considered by many to be healthcare. Changes in healthcare reimbursement are becoming a primary reason decades of wealth can quickly erode. These changes are resulting in expert predictions that many surviving spouses will be left destitute due to out of pocket healthcare and homecare expenses. Properly structured, the business assets and income can be better protected.
Better Protection of Business Appreciation. Historically, if somebody bought a business and the profitability of the business increased $150,000 to $200,000, the value of that business often increased over a half a million dollars. The problem comes when one sells the business, since in most cases, the appreciation of the business would be subjected to an immediate taxation event, (both federal and state income tax). But that’s not the worst part. The worst part is that the net proceeds are often forced into an unprotected checking or savings account subjecting that wealth to future personal liability risk. Conversely, the Benetrends plan can enable the owner to take the appreciation before a single dime of taxes are taken out and use those proceeds to buy a bigger, better business or move those funds into the retirement plan where they’re protected (often times for the rest of the owner’s life). If something happens to either spouse, the proceeds are protected for the surviving spouse; if something happens to both of them, the wealth is protected as a legacy for their children.
Reduce Financial Risk Up to 50%. Last, but not least, is what many people consider the best benefit. Normally, someone using cash would be assuming 100% of the financial risk of that investment. If for any reason the business doesn’t make it, they’ve lost 100% of that money. Sad to say, but for every dollar a person invests in cash, they will often have to generate $1.70 or more (after payroll, federal, and state income tax) to replace a dollar in savings. However, when you use retirement funds, you using pre-tax dollars. Often times, if you were to take a couple of hundred thousand dollars out of your retirement fund, it would push you up into the 33 to 35% + tax bracket. On top of that, many people would be forced to pay additional state income tax and, if you’re younger than 59 ½, you would also get hit with a 10% early withdrawal penalty; therefore, you may lose 50% or more. When you use retirement funds, you get 100% access to the retirement funds. If the business fails, you may have actually only lost 50% of the total amount. Even though you got 100% use of the money, you have gotten Uncle Sam to assume 50% of the financial risk. Even though you got 100% use of the funds, you never have to pay back federal or state taxes or the early withdrawal penalty.
Better Wealth Acceleration. Unlike traditional retirement plans, Benetrends creates custom options that help to accumulate, accelerate, and protect wealth two to ten times faster than simple IRAs or 401(k)s.
To learn more about this innovative funding program, contact:
Larry Carnell
CFE, CBI, CFB, CMT
Vice President of Development, Benetrends Financial, Inc.
Award Winning Entrepreneur, Management Consultant, Finance, Business & Franchise Expert, LinkedIn “Top Recommended Professional” Platinum
Phone: 770-652-5393 or email: Larry@benetrends.com
The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.
Ronald V. Chernak
President
Inspiring business relationships since 1982!
(Article previously published in March 2018 Newsletter)