LOANOLOGY

SUCCESSION LENDING

Planning for business succession is a critical step for small business owners and franchisees looking to transition ownership, whether through partner buy-ins or complete buyouts. SBA loans offer flexible financing options for these transitions, but they come with unique requirements. LoanBox simplifies succession lending, helping you navigate equity buy-ins and buyouts efficiently. Below, we outline key considerations and strategies to achieve a seamless ownership transition.

What Remaining Equity Partners Should Know

Lien Impacts on the Entire Business: Both SBA and conventional lenders place a blanket UCC lien on the entire business, even if the loan is for a small equity buy-in. This lien includes the equity of non-borrowing partners and all current and future business assets.

Personal Guarantees for Remaining Partners: Post-buyout, owners holding 20%+ equity must provide unlimited personal guarantees. Partners with less than 20% ownership must guarantee the loan for two years post-disbursement. SBA loans also include a six-month look-back, requiring personal guarantees from prior owners who held 20%+ equity within six months of the application unless fully divested.

Equity Buyout/ins

Partial Buyouts/ins

Purchasing part of a partner’s equity, with the seller retaining some ownership.

  • Equity Injection: 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: 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: Must be paid in cash, seller notes for partner buyouts for the purposes of the equity injection are ineligible.

  • Guarantors: Post-sale, owners with 20%+ equity (including the seller, if retaining equity) must provide a personal guaranty. Sellers retaining less than 20% must guarantee the loan for 2 years post-disbursement.

9:1 Debt-to-Worth Ratio

The 9:1 debt-to-worth ratio is a key SBA metric for waiving equity injections in partner buyout loans, assessing financial stability.

  • Calculation:
    Total Debt ÷ Total Equity = Debt-to-Worth Ratio

    • Total Debt: All business liabilities (e.g., loans, accounts payable) from the most recent fiscal year and quarter.

    • Total Equity: Owner-invested capital and retained earnings.

    • Example: A business with $900,000 in debt and $100,000 in equity has a ratio of $900,000 ÷ $100,000 = 9:1.

    A ratio of 9:1 or lower indicates lower financial risk, allowing a 0% equity injection. Ratios above 9:1 require a 10% injection to demonstrate stability.

LoanBox Loanology provides independent insights into small business lending based on what we know can be accomplished with most LoanBox lenders. However, there may be some policy, perspective, or viewpoint we share which may not reflect those of all lenders on our platform, as each brings unique policies. LoanBox lenders brings diverse policies and perspectives so not all lenders will be able to assist or even agree with all of the tips, strategies, articles, guides, and insights we provide for small business owner borrowers. Lenders are not responsible, liable or obligated for the content or advice provided in Loanology or on LoanBox.com. For specific guidance, use the search bar or just contact us directly and speak to a LoanBox Advisor.