How to Finance a Partnership Buyout
When you and your business partner have decided to go separate ways, finding the funds to cover their share of the business is often the biggest obstacle. The most common way to finance a partnership buyout is with a business loan. But that might not be the best choice for all businesses.
You could also look into alternative lenders, foot the cost yourself or sell your former partner’s share to investors. Considering all of your financing options first can help you find a solution that best fits with the vision you have for your business.
How to Finance a Buyout With a Traditional Business Loan
Some banks offer traditional term loans to pay for the cost of a business buyout. But these can be hard to come by. Companies tend to take a financial hit after a buyout, and many lenders don’t want to take on that risk.
Your best bet might be an SBA loan when it comes to a traditional business loan. These are partly backed by the government, offsetting some of the risks and making you a more attractive candidate to lenders.
The SBA recently revised the rules for its 7(a) loan program to make it easier to fund a partnership buyout. Before, you were required to foot 10% of the buyout cost yourself. Now, you might qualify for 100% funding if you’ve been an active participant in the business for the past two years and your company has a high debt-to-worth ratio before the buyout.
If you decide to go with a traditional lender, you’ll have to convince them that the new iteration of your business will continue to grow as strong as it has in the past — if not stronger. Revisit your business plan and financials, and consider hiring an expert to help you navigate the transition. You likely won’t be able to qualify for an SBA or traditional business loan unless your business has been around for a few years, has strong revenue and finances, and you have excellent personal credit.
How to Fund a Buyout With Alternative Business Loans
Luckily, there are other options from bank loans when it comes to financing a buyout. Many alternative lenders provide funding specifically for equity financing. Some offer term loans at a higher cost than a bank or SBA loan, which you can use for an equity buyout.
If your business relies on consumer sales, you might also want to consider a merchant cash advance. These are advances on your future credit and debit card sales, which you repay plus a fixed fee with a percentage of your daily revenue. Like alternative business loans, these tend to have more flexible eligibility requirements, though they can be more expensive.
One benefit of applying with an alternative lender is that you can often get your funds faster than if you went with a bank. SBA loans, in particular, are known for taking months to process. Only around half of SBA applications were approved in 2017, according to a study by the Federal Reserve.
In contrast, almost 80% of merchant cash advance applications were accepted.
How to Self-fund a Buyout
If you’d rather not add to your business’s debts when entering a new, risky phase, you might want to consider self-funding your buyout. There are two ways to do this: You can come up with a payment plan to buy them out or take out a personal loan.
A payment plan is generally the cheapest way to fund a buyout since you might pay less interest than you would with a loan from a lender — if any at all. But you’ll need to be on good terms with your partner and be willing to wait several months or even a few years before you become the full owner.
To speed things up, you might want to consider taking out a personal loan — especially if you have good credit. You can typically borrow up to $100,000 from a personal loan provider at more competitive rates than you’d get with a business lender.
But a personal loan comes with a risk: It’s your responsibility to pay it back. You will be on the hook for those repayments even if your business performs lower than expected after the buyout. If you decide to go this route, set aside some time to shop around and prequalify with several lenders to find the best personal loan you’re eligible for.
How to Finance a Buyout With Equity
Another option that doesn’t involve any cost is equity funding. This means bringing on another investor — or group of investors — to take over your partner’s share of the business. The downside is that you won’t have complete ownership and may run into the same problems you’ve been having with your current partner.
Vet your potential investors as much as they might vet you to make sure you’re bringing on someone who shares your vision. Otherwise, you might find yourself in this same position a few years down the line.
Which Loan Option is the Best for Me?
It all depends on where your business is and what you envision for the future. If you’re breaking professional ties with your partner because you want full ownership, you can write off equity funding right away.
Before deciding on a type of financing, you’ll want to compare business loans to see which works best for your business. More-established businesses might benefit the most from a low-cost SBA loan. But if you’re new to the game — or just want to make the break sooner than later — alternative business loans or self-funding might be the way to go.
About the author
From newspaper editor in Beirut to trusted loans expert in the US, Anna Serio has published more than 500 articles on Finder to help Americans strengthen their financial literacy. Anna writes about personal, student, business and other loans supported by two years of increasing expertise. Today, digital publications like Fundera, Business.com, Success.com, and ValueWalk feature her articles for professional advice and best practices with financial products.
