United States
Updated: August 16th, 2023
If you and your business partner agree to go your separate ways — and you want full ownership of the company — you may decide to initiate a partner buyout.
A business partner buyout is a transaction where one partner in a business buys out the ownership stake of another partner. This can happen for a variety of reasons, such as one partner wanting to retire or leave the business, or a disagreement between partners about the direction of the company.
The process typically involves negotiating a fair price for the departing partner’s share of the business and transferring ownership through legal documents. It is important to have a clear agreement in place beforehand, such as a buy-sell agreement, to ensure a smooth and fair process for all parties involved.
Beyond agreeing on the terms of the buy and sell agreement, however, the biggest issue you’ll likely face is financing. Partner buyouts can be expensive, and depending on the financial health of your business, you may not have enough money to pay out of pocket. If that’s the case, you’ll need to consider financing solutions.
The funding source will ultimately depend on factors such as the size of the buyout, the financial situation of the business, and the goals of the partners involved. That said, most partner buyouts are funded using either equity or debt.
Equity financing allows the remaining partner to sell a portion of the business to outside investors in exchange for cash. This cash infusion can then be used to buy out the departing partner’s share of the business. The remaining partner may also choose to use equity financing to buy out the departing partner directly, by using the cash from the investment to purchase their shares.
Debt financing is borrowing money from a lender, such as a bank or a private investor, which is then used to buy out the partner’s share of the company. The borrower agrees to repay the loan with interest over a predetermined period.
Equity can be a beneficial option for both parties, as the departing partner can receive a fair value for their share of the business, and the remaining partner can continue to operate and grow the business without the constraints of a partner who wishes to leave.
However, it is important to carefully consider the terms of any equity agreement, as outside investors may seek a controlling stake in the business or impose other restrictions that could impact the remaining partner’s ability to manage the business. Debt funding is more common, but it’s also more difficult to secure financing this way.
Unfortunately, without a guarantee that a partnership buyout — and the extra financing it requires — will immediately help the business grow or turn a profit, many banks are reluctant to issue loans to fund buyouts.
You still have several options for financing beyond applying for traditional bank loans, though. Here are three strategies to consider for partner buyout financing:
Many business owners opt to self-fund their partner buyout. With this method, the leaving partner acts as a lender whom you pay over a set amount of time. This is a good route to take if you and your business partner have an amicable relationship and set clear terms surrounding payment.
If, however, you have a tense business relationship with your partner, you may not want to prolong the buyout process by continuing to pay little by little.
The Small Business Administration (SBA) backs certain types of loans that allow business owners to fund partner buyouts. One such type is the 7(a) loan, designed to help entrepreneurs start a business or expand an existing business through a strategic move such as a partner buyout or acquisition.
The SBA’s most widely used loan program, financing is delivered through an approved SBA lender and individuals can borrow anywhere between $20,000 and $5 million for as long as a 10-year term.
The SBA’s 7(a) loan program is attractive to many small business owners for its below-market interest rate. If you apply through Funding Circle’s network of SBA lenders, you’ll see that the interest rate is currently set at Prime + 2.75% (currently 9%).
Getting approved for this type of loan, however, requires careful planning. Your business must have an operating history of at least three years to qualify, and keep in mind that a 10 to 30 percent down payment is usually required for these types of loans. In addition, you’ll need to develop a post-exit strategy and explain how you’ll run the business effectively on your own.
This application process, combined with the amount of time it takes to get approved and receive the funds, can take several months, so it may not be the best option if you need to act quickly.
With set monthly payments and no prepayment penalties, our Business Term Loan was designed to be as flexible as possible, meaning your loan funds can be used for almost any business purpose such as cash flow management, equipment financing, and other business expenses. Applying for our small business loan has no effect on your credit score and repaying your loan on time even helps your business build good credit!
The best part: you can apply in just 10 minutes and get a decision in as little as 24 hours after document submission!
The financial aspect of the buyout can be a challenge for both parties involved. Emotions can often run high when it comes to financial matters, which can make negotiations difficult and potentially lead to a breakdown in communication and trust. If you’re considering a partner buyout, it’s vital to have a solid plan in place to finance the transaction and ensure a smooth transition for everyone.
Paige Smith is a content marketing writer who specializes in writing about the intersection of business, finance, and tech. Paige regularly writes for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.
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