Kent Reed of Marietta-based Murphy Business and Financial Corporation is a broker who matches business owners with potential business buyers. Reed says year-end job cuts are commonplace, and often it is the higher-level executives who are eliminated to cut larger salaries from the company’s bottom line.
“We meet a lot of executives who have survived several rounds of layoffs and now they are being kicked to the curb — usually because of their salary,” said Reed. He says his typical client is in their late 40s or early 50s.
Reed says business has grown as people are looking for ways to own their own business and earn a salary from day one.
While they do occasionally connect buyers with franchises, Reed’s company primarily sells existing businesses that have a track record of profitability.
“Franchises are lower dollar, but usually take a couple of years to be cash-flow positive,” he said.
Kent says traditionally, Small Business Association loans are the best way to finance the purchase a business; but a growing trend is the “Rollover as Business Startup” program, whereby the IRS allows individuals to rollover and invest 401(k) funds into a business without incurring taxes.
Pennsylvania-based Benetrends is one of the national companies to pioneer the financing vehicle; but an IRS guideline published in 2008 called it “questionable,” saying, “While ROBS would otherwise serve legitimate tax and business planning needs, they are questionable in that they may serve solely to enable one individual’s exchange of tax-deferred assets for currently available funds, by using a qualified plan and its investment in employer stock as a medium.”
Some warn against utilizing ROBS as a financing tool, including Marietta CPA Doug Chaffins.
“I would not advise a client to do this,” he said. “There are too many pitfalls even beyond the possibility of losing your retirement savings in the new company.”
Chaffins says the process is tricky and requires a determination letter — or an approval — granted from the IRS after the transaction.
“What would you do if the IRS came back and said it didn’t meet requirements?” Chaffins said. “You would have ready cashed out your retirement and it would all then be taxable.”
To date, many have used the program, including East Cobb resident Andy Harrison. At 49 years old with a wife and two daughters in college, he was let go by Atlanta Gas Light Company after he completed a year-long merger for the company.
He searched for a job at the same salary point, but to no avail.
“I did market myself, but there were not jobs at my level,” Harrison said. “The higher you go, the fewer jobs there are.”
He decided to buy his own company and engaged Reed to find one. In May, after looking at 30 different companies over a six-month period, he bought property management company COG Management, using his 401(k) to fund the transaction.
“I bought a good business,” he said. “It was already cash-positive — that was the advantage of not starting from zero.”
Keeping the former owner on a contract basis to help transition and grow the company, Harrison says they have grown from 300 to 500 homes under management since May.
“It’s the best thing — but the hardest thing — I have ever done,” Harrison said. “It feels different when it’s your money.”