Using SBA Loans for Partner Buyouts
Using SBA Loans for Partner Buyouts
Navigating a partner buyout can be a pivotal moment for your business, whether you're aiming for full control or adjusting ownership stakes. SBA loans offer a powerful financing tool to fund both complete and partial partner buyouts, ensuring a smooth transition while maintaining financial stability. At LoanBox, we simplify the process, matching you with the right lenders to secure the funding you need in 2025. Here's everything you need to know about using SBA loans for partner buyouts.
Partner Buyout Loans
A partner buyout loan finances the purchase of a partner’s equity in a business, allowing you to increase your ownership stake, either fully or partially. The purpose of this loan is to fund the acquisition of a partner’s equity to achieve:
Complete ownership (100% equity).
Partial ownership (less than 100% equity).
These loans cover the purchase price and related costs, providing a structured way to transition ownership without draining personal or business resources.
Complete Partner Buyout: A complete partner buyout occurs when an existing shareholder purchases the entirety of a partner’s equity, resulting in the buyer owning 100% of the business. This is ideal for those seeking full control and decision-making authority.
Partial Partner Buyout: A partial partner buyout involves an existing shareholder purchasing a portion of a partner’s equity, with the seller retaining some ownership. This allows for shared ownership while adjusting stakes to reflect new roles or contributions.
Equity Buy-In: An equity buy-in happens when a non-shareholder purchases equity, resulting in ownership of less than 100% of the business. This is common when bringing in new partners or investors without transferring full control.
Equity Injections for Partner Buyouts
Partner buyouts, whether complete or partial, come with specific equity injection requirements to ensure the business remains financially sound post-transaction. Here’s how it works:
Complete Buyout: Purchasing 100% of a partner’s equity, transferring their full ownership to you.
Partial Buyout: Purchasing part of a partner’s equity, with the seller retaining some ownership.
Equity Injection Requirements
The equity injection is the lesser of:
10% of the purchase price.
An amount ensuring a debt-to-worth ratio of 9:1 or lower on the pro forma balance sheet (based on the most recent fiscal year and quarter).
Exemption from Equity Injection
No injection is required if:
The buyer has been an active operator and owned 10% or more of the business for at least 24 months, verified by both buyer and seller.
The business maintains a debt-to-worth ratio of 9:1 or lower (total debt ÷ total equity).
Sources and Restrictions
Eligible Sources: Equity injections must be paid in cash. Seller notes for partner buyouts are ineligible for the purposes of the equity injection.
Guarantors:
Post-sale, owners with 20% or more equity (including the seller, if retaining equity) must provide a personal guaranty.
Sellers retaining less than 20% equity must guarantee the loan for 2 years post-disbursement.
Calculating the 9:1 Debt-to-Worth Ratio
The debt-to-worth ratio is a key metric that measures a business’s financial health by comparing total debt to total equity (owner-invested capital). A 9:1 ratio means $9 in debt for every $1 in equity.
How to Calculate:
Formula: Total debt ÷ total equity on the pro forma balance sheet (post-transaction).
Example:
$900,000 debt ÷ $100,000 equity = 9:1 ratio, meeting the threshold.
If debt is $1,000,000, an equity injection of $111,111 reduces it to 9:1 ($1,000,000 ÷ $111,111 ≈ 9).
A ratio above 9:1 signals financial risk, requiring a larger equity injection to stabilize the business. This is particularly relevant for service or retail buyouts, where cash flow may be tight. LoanBox helps you calculate and document this ratio to meet lender requirements and secure approval.
What Remaining Equity Partners Should Know
If you’re a remaining partner or involved in a partial buyout, here are critical considerations:
Lien Impacts on the Entire Business
Both SBA and conventional lenders place a blanket UCC lien on the entire business, even for a small equity buy-in. This lien covers:
The equity of non-borrowing partners.
All current and future business assets.
This ensures lenders have collateral but can impact partners who aren’t directly involved in the loan.
Personal Guarantees for Remaining Partners
Post-Buyout Guarantees:
Owners with 20% or more equity must provide unlimited personal guarantees.
Partners with less than 20% ownership must guarantee the loan for two years post-disbursement.
SBA Six-Month Look-Back:
Prior owners who held 20% or more equity within six months of the loan application must provide guarantees unless they have fully divested.
Buying Out a Partner? Think Inside the LoanBox
Navigating a partner buyout can be complex, but LoanBox is your trusted partner in securing the right financing for your small business or franchise in 2025. Our platform simplifies the process:
Log In: Access our user-friendly platform for free.
Complete Questionnaires: Provide details about your business and buyout needs.
Loan Package: Upload documents.
Lender Matching: Our system matches you with lenders based on dozens of criteria points, ensuring the right fit the first time around.
Receive Proposals: Review loan proposals from interested lenders and select the best offer.
Stay Informed: Track every step from application to funding, with clear guidance on what’s needed next and loan process alerts.
Alternatively, let a friendly LoanBox Advisor handle everything for you. For smart business lending, think inside the LoanBox. Whether you’re pursuing a complete or partial partner buyout, we’re here to help you achieve your ownership goals with confidence.