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Guide to Buying Out a Business Partner: Tips for Financing a Partner Buyout

Guide to Buying Out a Business Partner: Tips for Financing a Partner Buyout
Susan Guillory

Susan Guillory

Updated March 16, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Maybe your partner is ready to retire, but you want to keep running the business. Or, perhaps you have different views about how to run the business and have decided to part ways. Whatever the reason, buying out your partner’s ownership of the business might be the best step forward.Of course, partner buyouts can be expensive. And, depending on how your business is doing, you may not have enough cash on hand to pay for it out of pocket. The good news is that there are a variety of small business loans you can use to cover these costs. Business partner buyout loans work a little differently than other kinds of business loans, however. Below, we walk you through the process of financing a buyout and offer tips for making the separation process as seamless as possible.

What Is a Buyout?

A buyout is a way to end a business partnership that involves one business partner buying another partner’s ownership interest in the business.If there are only two partners in the business and you buy out your partner’s equity (whether it’s 50 percent or a different percentage), you would then own 100% of the business. If that’s the case, the buyout would also mean that the business is no longer a partnership and you would need to change the legal status of the company. 

How Do Buyouts Work?

Your partnership agreement (or articles of incorporation) may have been written to include a buy-sell agreement that outlines how buyouts are to be handled. Buy-sell agreements typically outline how ownership of the company is to be handled if one partner leaves, as well as how the value of a partner’s shares should be assessed. Before you begin the buyout process, it can be a good idea to review your partnership agreement to determine whether any buy-sell agreements factor into your buyout process.The next step is to determine the value of your business. For this, you may want to bring in an outside consultant that you both agree on. A professional valuation considers factors such as your company’s income, the market value of similar companies, and the fair market value of your company’s assets after liabilities are factored in.It can also be a good idea to consult with a lawyer with expertise in mergers and acquisitions. They can help structure the buyout deal so that it’s mutually beneficial for both partners, as well as help you set up a financing agreement, non-compete agreement, and a partnership release agreement.

Financing a Buyout

Once you and your business partner have agreed to part ways and you know the value of your business, the next step is to find the funds to cover your partner’s share of the business. Whether you choose to pay a lump sum or buy your partner out over time, you may need to explore partner buyout financing to get the capital you need for the transaction. While some banks offer traditional term loans to pay for the cost of a business buyout, these can be hard to come by. Businesses often take a financial hit after a buyout, and many traditional banks don’t want to take on that risk. Fortunately, there are some other options for financing a buyout.

SBA Loans

If your business has a solid operating history, has increased profits in the last six months, and you have excellent personal credit, a loan backed by the U.S. Small Business Administration (SBA) can be a good way to finance a buyout. Because these loans are partly guaranteed by the government, it offsets some of the risk for the lender and makes you a more attractive borrower. SBA loans come with low interest and long repayment terms. However, in addition to solid financials, you’ll likely need to present a strong application that includes a plan for how you’ll run the business effectively on your own. 

Pros of SBA Loans

  • SBA lenders may be more likely to finance a partnership buyout than banks.
  • These are among the most affordable small business loans, offering long repayment periods and low interest rates.

Cons of SBA Loans

  • If you don’t have great credit or haven’t been in business for at least two years, you may not qualify for an SBA loan for a buyout. 
  • Applying for an SBA loan is a lengthy process, and it can take many months before you receive the funding.

Alternative Business Loans

If you don’t qualify for an SBA loan or want to move quickly on a buyout, you might consider applying for a small business loan through an online or alternative lender. Alternative lenders tend to look at a broad range of criteria to approve a buyout loan, which means they can be easier to qualify for than loans from banks or SBA lenders. The approval process also tends to move much more quickly. However, these loans typically cost more than SBA and bank loans.

Pros of Alternative Business Loans

  • Even if you don’t qualify for a bank or SBA loan, you may be able to get buyout financing from an alternative lender.
  • The application and approval process is typically quick — you may be able to get buyout financing within a few days or weeks.

Cons of Alternative Business Loans

  • Alternative lenders typically charge higher interest rates and fees than banks or SBA lenders. 
  • Typically, loan amounts are smaller, and repayment terms are shorter than they are with bank and SBA loans.
Recommended: How to Get a Business Acquisition Loan 

Pros and Cons of Partner Buyouts

If you’re researching how to buy out a business partner, you’ve likely already made your decision. Still, there are some benefits and drawbacks to partner buyouts you should be aware of before you move forward.

Pros

  • It ends the partnership quickly. If your partnership is no longer working, a quick exit can be ideal. Buying your partner out allows you to get back to focusing on your business and gives you full control over how to move the company forward.
  • It allows you to keep the business going. If you buy out your partner, rather than dissolve the business, you can keep your business running and won’t have to start all over again from scratch. 

Cons

  • It can be costly. Buyouts can be expensive, and you will likely also need to take out financing, which means paying interest and fees.
  • It could have a negative impact on the business. If your business partner provides value to your business through expertise or connections, buying out your partner means giving up those assets.

Alternatives to Partner Buyouts

If you want to separate from your partner but don’t want to get a buyout loan, there are some other alternatives to a full, upfront buyout that you may want to consider.Buy your partner out over time. If your partner is open to it, you could agree to a payment plan over time. Each month, you would pay your partner part of the buyout over an agreed-upon period. Change the weighting of the partnership. If you want to continue with the current business, but your partner has lost interest, you might consider changing the weighting in the partnership agreement. This would allow you to retain primary control of the company's decisions and finances without the upfront cost of buying out your partner completely.Find a different partner (or partners). If your current partnership no longer works but you like having a partner, you might look into finding another partner who can buy out your current partner’s equity. Or, you could use equity financing to buy out your partner, which involves selling their ownership shares to multiple investors.Dissolve the partnership. This would allow you to go your separate ways without any one person needing to buy out the other person.

The Takeaway

The best way to finance a buyout will depend on where your business is right now and what you envision for the future. If you’re breaking ties with your partner because you want full ownership, then getting a buyout loan may be a good option.Before deciding on a type of financing, you’ll want to compare business loans to see which works best for your business. If your company is well-established, you might want to pursue a low-cost SBA loan to buy out your partner. If your business is on the newer side — or you’re looking to make the break sooner than later — alternative business loans might be the way to go. Curious about what type of buyout financing you might qualify for? Lantern by Sofi can help. With our online lending platform, you can quickly compare offers from multiple small business lenders with just one application.
Photo credit: iStock/PeopleImagesThe tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0122017

Frequently Asked Questions

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About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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