Partner Buyout Loan

Buying Out a Business Partner and Getting a Loan to Buy Out a Partner

In a business partnership, changing professional or personal circumstances may sometimes require one partner to exit. Whether driven by new opportunities or shifting goals, buying out a partner can facilitate a smooth transition and pave the way for future growth. However, this decision requires careful planning, financial assessment, and legal considerations.

This guide will walk you through everything you need to know about buying out a business partner, from preparation to financing options like SBA loans. We will share the next steps and the tools to make informed decisions about your partner buyout and loan options to support it.

How Do I Prepare for Buying Out a Business Partner?

Preparation is key when initiating a partner buyout. Here’s how you can get started:

1. Evaluate your Current Business Dynamic – Determine how your partner’s departure will affect daily operations and overall growth. Identify any skill gaps or responsibilities that may require additional training or new hires.

2. Review Your Partnership Agreement – Check for any buyout procedures or terms outlined in your agreement to ensure you follow the proper process.

3. Evaluate Your Financial Positioning – Determine if you have the funds to buy out your partner independently or if you will need financing, such as a partner buyout loan.

4. Seek Professional Guidance – Consult legal and financial advisors to navigate the legal, tax, and financial implications of the buyout.

General Rules for a Business Partner Buyout

Every business buyout is unique, but certain best practices can help to ensure a smooth process. The first step to any successful buyout is to have a professionally drafted buyout agreement that establishes clear terms. Use a qualified appraiser or valuation expert to keep valuations fair and impartial. Maintain open and professional communication with your business partner, documenting all discussions. Be prepared to negotiate terms that are fair to both parties. Above all, approach the process with a constructive and positive mindset to facilitate a successful transition.

How Do You Figure Out the Price of a Business Partner Buyout?

Determining the value of your business is a critical step in a partner buyout. Many business owners hire professionals, such as accountants or business appraisers, to provide an objective valuation. This valuation process typically includes:

• Assessing Tangible Assets: Physical property, equipment, and inventory should be evaluated.
• Evaluating Intangible Assets: Consider brand reputation, customer loyalty, and intellectual property.
• Analyzing Revenue and Profit: Review current revenue streams, profit margins, and cash flow.

Calculating Partner Equity for All Partners

The buyout price will depend on your partner’s equity stake in the business. Equity refers to the partner’s percentage of ownership, which should already be outlined in your partnership agreement. If the agreement doesn’t specify this or if disputes arise, professional advisors like accountants, valuation providers or mediators may need to be hired to negotiate the transaction.

Getting a Business Loan for a Partner Buyout

If you lack sufficient liquid capital, financing can be a great option for a partner buyout. Common loan types include:

• Traditional Bank Loans: These loans offer competitive interest rates but typically require extensive documentation, collateral and strong credit.
• SBA Loans: Backed by the Small Business Administration, SBA loans are designed to support small business needs, including partner buyouts. With lower down payments and longer repayment terms, they can be a more flexible and attractive financing option compared to traditional loans

Getting a U.S. Government-backed SBA Business Loan for a Partner Buyout

The SBA offers several programs specifically designed to support small businesses, including partner buyout financing. These government-backed loans reduce the risk for lenders and offer borrowers lower interest rates and favorable terms. To apply, you’ll need to submit supporting documents like tax returns, a business plan, and information about the buyout. The key benefits of SBA partner buyout loans are lower down payments (as low as 10% in some cases), and extended repayment terms, typically ranging from 7 to 25 years, depending on the loan type.

SBA 7(a) Loans for Partner Buyouts

The SBA 7(a) loan is the most popular SBA lending program for partner buyouts. Due to its funds flexibility, an SBA 7(a) loan may be used for a wide range of purposes, including purchasing business equity. Notable advantages include loan amounts up to $5 million, flexible repayment terms and competitive interest rates. For example, a Colorado ski rental business recently secured a $2.2MM SBA 7(a) loan to buy out a retiring owner, helping ensure business continuity.

SBA 504 Loan for Partner Buyouts

The SBA 504 loan is a strong financing option for businesses with significant real estate or large equipment assets. While it’s less commonly used for partner buyouts, some entrepreneurs leverage it to finance the commercial real estate or equipment included in the buyout structure. With fixed low-interest rates and repayment terms of up to 25 years, the SBA 504 loan is an excellent choice for businesses looking for long-term, asset-based financing.

What Are the Taxes on a Partner Buyout?

Taxes are an important factor in a partner buyout. The way the deal is structured can create tax liabilities for both the buyer and the seller. For example, the selling partner may owe capital gains tax, while the buying partner could have opportunities for deductions or debt write-offs. Working with a tax advisor as part of the buyout process can help you minimize liabilities and stay compliant with tax regulations.

What’s in a Partnership Buyout Agreement?

A buyout agreement is the foundation of a successful transition. At minimum, it should address:

• The agreed-upon purchase price
• Payment method and schedule
• Non-compete clauses, if applicable
• Terms for future involvement in the business

Are Attorneys and Accountants Required?

They are a must. Advisors such as attorneys and accountants are indispensable for ensuring a smooth buyout process. The attorneys will draft or review the buyout agreement, ensuring it’s legally sound and protects your interests. Accountants will help with business valuations, tax strategies, and financial planning.

Take Control of Your Business’s Future

Buying out a business partner can feel overwhelming, but with proper planning, professional support, and the right financing, it’s a manageable process that can lead to exciting opportunities. If you’re exploring options like SBA partner buyout loans, consider working with experts who understand small business financing. Financial institutions like First Bank of the Lake offer personalized assistance and quick loan processing, as seen in successes like Reed’s Moving Services securing a $3.3MM 7(a) loan in under 30 days. Start your new chapter of business ownership today.

About First Bank of the Lake

The friendly financial experts at First Bank of the Lake offer SBA loans designed with the needs of our customers in mind. We financed more than $500 million in SBA loans over the past 12 months and are ranked as the 14th largest SBA lender in the United States. Since our founding in October 1985, we have offered outstanding customer service and the best financial options for their needs. Today, First Bank of the Lake offers loans for business enterprises across the United States. To learn more about our bank or to apply for an SBA loan, visit our website or check us out on Facebook or LinkedIn. Our friendly and knowledgeable staff members will be happy to discuss your loan options with you and to help you achieve the highest degree of success in your chosen industry. Please contact us at (888) 828-5689 to get your business loan questions answered today!