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V O L . X X V I N O. V I I A P R I L 6 , 2 0 2 0 22 B A N K I N G / F I N A N C E / I N S U R A N C E F O C U S I n 2018, Bill and Mary Ann Hinko were thinking about changing careers. ey lived in Virginia. She was an elementary school teacher and he was an accountant who worked for the same company for 31 years. Innkeeping seemed like an attrac- tive second act. ey took an "aspir- ing innkeepers" course and looked at dozens of inns for sale. Last summer, they fell in love with the James Place Inn Bed & Breakfast in Freeport. e price was just over $1 million. e couple didn't want to bankroll the purchase with a loan. rough the course of their property search, Bill Hinko learned about an alternative funding vehicle, called "rollover for business startups," or ROBS. "We didn't have a bag of money lying around," says Hinko. "We paid off our home mortgage five years ago and I hated the idea of getting back into a loan. We looked around and there was this funky ROBS vehicle." e investment vehicle allows investors with 401(k) plans and Individual Retirement Accounts to use the funds to buy a business and pay for start-up costs. A four-step process allows the account holder to access the cash without paying early with- drawal penalties or taxes. It's becoming increasingly prevalent among retire- ment account holders. Many have spent decades in the corporate world, aren't ready to retire, but are looking for that "second act" business. "We're happy with the choice and it hasn't been a painful implementa- tion," says Hinko. "It isn't simple, but it is reasonable." A shelter from the storm As it abruptly turned out in this time of crisis, which is battering the hospi- tality industry, among others, there's an extra plus. "I'm grateful not to have to worry about debt service if we do wind up hav- ing a down year," Hinko says. e recent stock market meltdown demonstrates timing is everything. "Unfortunately, the market volatility may put a damper on ROBS for a bit, as folks will not want to lock in losses," says Jerome Gamache, an attorney who spe- cializes in ROBS at Ainsworth, elin & Raftice in South Portland. How it works Setting up a ROBS is a four-step process, says Dallas Kerley, president and CEO of North Wales, Pa.-based Benetrends Inc. Create a C corporation, a structure that meets certain IRS guidelines to provide tax benefits. Design a new retirement plan for the corporation. Roll over current retirement plan funds into the new corporation's retirement plan. e new retirement plan is then able to invest in the newly formed C corporation by buying stock in the corporation. e sale of stock provides capital to start, buy or recapitalize a business or franchise. Benetrends' founder, Leonard Fischer, is the original architect of the vehicle, says Kerley. e idea was to allow people thinking about owning a small business or franchise to use the money in their retirement plans to fund the business without debt, taxes or pen- alties. Since Benetrends was founded in 1983, it has helped over 17,000 small business owners implement ROBS. In Maine, Benetrends currently has 47 clients, all lodging owners. Companies like Benetrends adminis- ter the plan once it's created, performing tasks such as filing annual tax forms. Typical clients are age 45 to 60. "ey have a retirement plan," says Kerley. "A lot of times it's a lifestyle change. ey're in corporate America and they say, 'I'm going to become my own boss.'" e vehicle allows new business owners to take a salary, even if the busi- ness isn't up and running yet. "ey can get a salary, pay their mortgage and car payments," Kerley says. "at can eliminate some of that stress when starting a new business." Buyers often use ROBS as one part of a funding mix, which includes other sources like bank loans and the sale of other property. Typically, it takes 15 to 20 business days from the start of setting up a ROBS to having access to the cash, says Kerley. at compares with 60 to 90 days to get a small-business loan. Speed is beneficial. "If they want to make a bid on a property, if they can get their cash sooner, they can get their offer in sooner," says Kerley. "Some people do a rollover so they can have cash in hand, then they shop for a business. You want to be able to pull the trigger fast." It's beneficial to sellers, as well. "ey don't have to take the property off the market only to find you don't qualify for a loan," says Kerley. It costs about $5,000 to set up a ROBS. A yearly management fee is about $1,700. Not free money ere are also negative considerations. "I'd love to say everybody is 100% suc- cessful, but people do go out of business even if they utilize this plan," says Kerley. In that case, the client loses not only his business but the retirement money that went into it. "I try to make sure clients realize it's not free money," says Gamache at P H O T O / T I M G R E E N WAY Retirement rollover for business A financing tool that has tax advantages — but beware of market volatility B y L a u r i e S c h r e i b e r F O C U S Bill Bill and and Mary Ann Hinko Mary Ann Hinko used a used a funding vehicle called "rollover for funding vehicle called "rollover for business startups," or ROBS, to business startups," or ROBS, to buy the buy the James Place Inn Bed & James Place Inn Bed & Breakfast Breakfast in Freeport in Freeport

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