The ability to access IRA or other retirement account assets to fund the acquisition of a business, whether it’s an on going business or a start-up, has been available since IRAs were created in 1974. However, it has only been in the last ten years or so that many aspiring business owners really became aware of the option.
Self-directed IRAs are an enormous source of capital for prospective business owners, currently totaling $4.2 trillion and growing at $200+ billion per year, largely due to the increased number of pension plans rollovers into IRAs as the “baby boomers” retire.
A word of caution is in order, as IRAs and other retirement accounts are designed to encourage individuals to put money away to fund their own ultimate retirement, and as such, they should not be squandered on foolish and ill-conceived ventures. Failure rates for business startups are quite high, with less than 1 in 7 startups surviving until their 5th anniversary. Failure rates for new franchised businesses are substantially higher, with 95% still in business after 5 years, and survival rates for an ongoing business are better still.
While the purchase price of an ongoing business with a proven cash flow will likely be substantially higher than a start-up, the premium paid for a much, much higher probability of long tern success may be well worth it.
Self-directed IRAs for business acquisitions can be funded solely by new contributions, or by rollovers from pension plans like 401(k) plans of former employers. Rollover assets can be particularly useful as they are generally larger in dollar value than single year contribution limits and can be used for a more substantial investment. There are rules when using these funds, but with the help of experienced professionals who understand the rules, using these funds can significantly open up opportunities for private equity investments.
If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a free, confidential, consultation with us, have them contact me at firstname.lastname@example.org
By: Mike Ertel, Transworld M&A Advisors