401k to buy business is a funding line, and it is worth seeing it as one. In the stack the free calculator on this site works, the price is split between the bank's note, the seller's note and the buyer's own cash, and a rollover of retirement funds into a plan that buys the buyer's corporation is one way of filling the last of those. This page shows what that line is on a worked stack, what happens when the rollover is made larger to shrink the notes, and what the arrangement asks of the buyer afterwards.
The line the rollover fills
On the worked example a $450,000 business with the bank at 80% and the seller at 10% leaves $45,000 of the price for the buyer, and the day adds $40,000 of working capital and $25,000 of closing costs. A rollover of $110,000 into the buyer's new corporation covers the whole day without a distribution, which is the arrangement's appeal.
Making the line bigger
Roll more and borrow less: with the bank at 60% and the seller at 10%, the buyer's cash on the price is $135,000 and the bank note falls to $270,000, costing $3,643.25 a month instead of $4,857.66. The year's debt service drops from $68,731.68 to $54,158.76 and coverage on $90,000 of earnings after pay rises from 131% to 166%. The buyer has bought a safer year with more of their retirement.
What the arrangement asks afterwards
The IRS describes the rollover as business start-up as owners using retirement funds to pay for business costs through a plan that buys the corporation's stock, and its compliance project lists what sponsors got wrong: unfiled returns, excluded employees, unappraised stock. The plan has to be run as a plan every year the business exists, and the register in Pro keeps those filings as dated items beside the lender's.
Questions people ask about 401k to buy business
Does the bank count rolled funds as my equity?
Generally the corporation's cash is the buyer's side of the deal. Ask the lender how they treat it; the sheet shows the stack either way.
What if the business fails?
The plan's stock in the corporation is worth what the corporation is worth. The retirement went into the business, which is the risk the arrangement carries.
Where is the sheet kept?
Free in the page today; in Pro beside the target with every version you tried, for $14 a month.