Business partnerships, like all relationships, can change over time. Whether your partner is retiring, moving on to a new venture, or you have differing visions for the future, a buyout is often the most practical solution. The big question for many small business owners is: how do you finance it? The good news is that you can absolutely use an SBA loan to buy out a business partner. This article will walk you through how the process works, what lenders look for, and how to prepare for a successful application.
How an SBA Loan for a Partner Buyout Works
When you use an SBA loan for a partner buyout, you are essentially purchasing the remainder of the business from the departing partner. The most common loan for this purpose is the SBA 7(a) loan, which is a versatile financing tool for a variety of business needs. The loan is not made by the SBA itself, but by a participating lender (like a bank or credit union) and is partially guaranteed by the SBA. This guarantee reduces the lender’s risk, making it easier for small businesses to get funding.
The buyout must result in you, the remaining partner, owning 100% of the business. The funds from the SBA loan are used to pay the departing partner for their equity stake. For more details on eligible uses of SBA 7(a) loans, you can refer to the official SBA website.
Key Requirements for an SBA Partner Buyout Loan
To secure an SBA loan to buy out a business partner, you’ll need to meet several requirements. Lenders will scrutinize both your personal finances and the health of the business.
- Business Valuation: You’ll need a third-party business valuation to determine the fair market value of the departing partner’s equity. This ensures the buyout price is reasonable.
- Buy-Sell Agreement: A formal agreement outlining the terms of the buyout is required. This legal document should be drafted by an attorney.
- Strong Financials: The business must demonstrate a history of strong cash flow and profitability, sufficient to cover the new loan payments and other obligations.
- Good Credit: Lenders will look for a good personal credit score from the remaining owner, typically 640 or higher.
The Application Process: A Step-by-Step Overview
Navigating the application for an SBA loan can seem daunting, but breaking it down into steps can help. Here’s what to expect when you apply for a partner buyout loan:
| Step | Action |
|---|---|
| 1. Get a Business Valuation | Hire a qualified professional to determine the value of the business. |
| 2. Draft a Buy-Sell Agreement | Work with an attorney to create a legally binding buyout agreement. |
| 3. Gather Financial Documents | Collect business and personal tax returns, financial statements, and other required documents. For a comprehensive list, check out this resource from Forbes. |
| 4. Find an SBA Lender | Not all lenders handle partner buyouts, so find one with experience in this area. |
Conclusion
Using an SBA loan to buy out a business partner is a powerful strategy to take full control of your company’s future. While the process requires careful planning and documentation, it’s a well-established path to sole ownership. By ensuring your business financials are strong and working with experienced professionals, you can navigate the transition smoothly.
If you’re considering a partner buyout, we can help. Contact us today to discuss your specific situation with one of our SBA loan specialists.
