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Stocking Up

You get more than financing when you tap your 401(k) to buy stock in your business.

After nearly 20 years in sales and sales management for a large manufacturer of printed forms, labels and electronic printing systems, Jim O'Brien was getting antsy. The business plan he was writing in his head was getting more and more detailed. And when the future of the company he was working for began to seem less than certain, O'Brien, along with five fellow salespeople--Paul Hoffman, Jeff Porter, Mike Ryan, John Talaga and Sue Sharkey (pictured, left to right)--made the jump to form Print Management Partners Inc., a Des Plaines, Illinois, company that, not surprisingly, brokers printing services and also offers electronic printing and forms-management services.

O'Brien's business plan showed the company needed about $500,000 during the first year of operation for office equipment, an inventory of forms, and to fund receivables. In theory, Print Management Partners was ready to roll, but O'Brien wasn't ready to hold the grand opening until he knew the business could be funded.

"I thought it would be a big mistake for us to launch headlong into the business without any funding," he says. "At the time, the biggest asset I had was the 401(k) plan from my previous employer, so naturally, my first thought was to see what could be done with that." In fact, all the newly minted Print Management partners had 401(k) plans, and, in the aggregate, these had more than enough assets to fund the business. The trick was unlocking the funds.

"The way I saw things was that a 401(k) plan can buy stock in any company," says O'Brien, "so why not directly from my own--or, better yet, through an Employee Stock Ownership Plan [ESOP] established by Print Management Partners? This was the safest investment we could make because we understood the business inside and out and had control over its destiny." But everybody O'Brien talked to, including investment bankers, brokerage firms, attorneys and financing consultants, said it couldn't be done because 401(k) plans are restricted to purchasing shares in publicly held corporations.

Of course, O'Brien and his partners could have liquidated their 401(k) plans. But, he says, there's a steep penalty right off the top, and the distribution from the liquidation must be reported as income in the year in which it is received. A good-sized distribution will push the recipient into the higher end of the thirtysomething-percent tax bracket. No, thank you!

The litany of no's gnawed at O'Brien. After all, an ESOP was the most democratic way possible to run a company. How could laws be on the books to prevent employees from furthering the cause of their own company?

But one day, instead of hitting the brick wall, O'Brien walked right through it when he talked to attorney Greg K. Brown, an ESOP specialist in the Chicago office of law firm Oppenheimer, Wolff & Donnelly. With little fanfare, but a great deal of confidence, Brown said the deal could be done.

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This article was originally published in the April 1997 print edition of Entrepreneur with the headline: Stocking Up.

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