• Skip to main content
  • Skip to header right navigation
  • Skip to site footer

(858) 762-2774Schedule Appointment

ThinkSBA

ThinkSBA

SBA Loans in San Diego, Orange County and Los Angeles

Get Started
  • Loan Options
    • Business Acquisition
    • Franchise Acquisition
    • Partner Buy-Out
    • Real Estate Purchase
    • Working Capital
  • Loan Payment Calculators
    • Mortgage Loan Calculator
    • Term Loan Calculator
  • Resources
    • About
    • Blog
    • Podcast
    • FAQ
  • Contact
  • Get Started

Why The SBA 7(a) Loan Program Is The Best Financing Option To Buy-Out A Partner

by Ryan Smith on September 21, 2020

Business succession planning is vital to the longevity of any business. This is especially true when a business is owned by two or more individuals, for seldom do business partners share the same retirement and life goals.

Therefore, a business is most likely to experience an interruption or even worse, the ceasing of operations altogether, when one partner is ready to exit the business and the others are not. This matter is further complicated when the partnership also owns both the business and the real estate from which the business operates.

Possible scenarios, when one partner is ready to exit and the others are not, include a private loan from the partner exiting the business to the remaining partners, an earn-out for the benefit of the partner exiting the business paid out over several years or a venture capital non-bank funding source. These funding sources are often expensive and complicated.

None of these scenarios likely meet the goals of all parties involved.

On the other hand, if a partner buy-out is structured correctly, the SBA 7(a) loan program is perfectly suited to meet the goals of both the partner exiting the business and the remaining partners.

The partner exiting the business is able to receive full payment for their equity ownership and therefore enjoy retirement by dropping all involvement in the business.

The partners remaining in the business take 100% control with no cash out of pocket as long as the business balance sheets for the most recently completed fiscal year and current quarter reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership.

Other benefits of the SBA 7(a) loan program include:

  1. SBA loan interest rates are competitive with conventional rates
  2. SBA guarantee fees may be financed instead of paid out of pocket preserving precious operating capital
  3. The loan is amortized over a 10 year period
  4. There is no prepayment penalty
  5. There are no financial covenants or burdensome annual documentation review requirements
  6. When the real estate is owned by all partners and included in sale, there is the ability for the partners remaining in the business to combine the partner buy-out with the real estate purchase into one loan amortized over a 25 year period

In conclusion, the following three tests must be met to ensure the partner buy-out passes the SBA’s eligibility requirements.

  1. The partners remaining in the business must own 100% of the business upon change of ownership and certify they have been actively participating in the business and held the same ownership interest for at least the past 24 months
  2. There is no earn-out to the benefit of the partner exiting the business in the purchase contract
  3. There is no mezzanine debt in a second position to the SBA Preferred Lending Partner
Category: Business Acquisition Loans, SBA 7(a) Loan Program, SBA Loan Podcasts

About Ryan Smith

Ryan helps business owners and entrepreneurs obtain financing to purchase real estate, acquire a business or franchise and obtain working capital to grow their business.

Previous Post:sba 504 and 7a real estate appraisal report explained thinksbaThe Commercial Appraisal Report
Next Post:The Science of SBA Loan Approvalscience of sba loan approval thinksba my sba loan pro podcast

Smart business owners ThinkSBA.

Choose ThinkSBA for your next small business loan and rise above the competition.

Get Started

Go Pro!

Speak with an SBA Loan Pro Monday – Friday

  • (858) 762-2774

  • [email protected]

  • DRE #02082585

Learn

Business Acquisition

Franchise Acquisition

Partner Buy-Out

Real Estate Purchase

Working Capital

Resources

Blog

Podcast

About

Contact

FAQ

Newsletter

Join hundreds of smart business owners who receive the latest SBA news and interest rate updates monthly. It’s free. Unsubscribe anytime. No spam.


  • Facebook
  • Instagram
  • LinkedIn
  • Twitter
  • YouTube

Copyright © 2023 · Silver Strand Capital LLC · All Rights Reserved · Powered by BizBudding · Return to top