10 Tips for Financing a Partner Buyout in Renovation Firms

Financing a partner buyout in a renovation firm can be tricky - lenders often see it as risky since it doesn't generate new revenue. But with the right approach, you can secure funding without putting your business at risk. Here’s a quick breakdown of the top strategies:

• SBA 7(a) Loans: Ideal for covering intangible assets like goodwill, offering up to $5M with repayment terms of 10–25 years.
• SBA 504 Loans: Best for real estate or equipment, with fixed rates and long repayment periods.
• Seller Financing: Lets the departing partner act as a lender, reducing upfront costs.
• Hard Money Loans: Quick funding backed by assets like real estate, but with higher interest rates.
• Home Equity Loans: Personal property can be used for funding, though it carries personal risks.
• Installment Payments: Spread the buyout cost over time to ease cash flow strain.
• Outside Investors: Exchange equity for cash, avoiding debt but sharing control.
• Debt-to-Net-Worth Ratio: Keep this ratio under 9:1 to qualify for better loan terms.
• Mix Financing Sources: Combine options like SBA loans, seller notes, or equity financing for flexibility.

Each option has pros and cons depending on your business’s assets, cash flow, and goals. Combining multiple strategies often works best, ensuring smoother transitions and manageable debt.

Option	Best For	Rates (Feb 2026)	Key Benefit
SBA 7(a) Loans	Intangible assets, goodwill	7.25%–9.75%	Covers diverse business needs
SBA 504 Loans	Real estate, equipment	5.67%–5.80%	Fixed rates, long terms
Seller Financing	Lower upfront borrowing	Prime + 1–2%	Flexible terms, reduces loan size
Hard Money Loans	Urgent funding needs	High	Fast approvals
Home Equity Loans	Owners with personal property	Varies	Accessible for homeowners
Installment Payments	Managing cash flow	Negotiable	Easier on working capital
Outside Investors	Avoiding debt	N/A (equity stake)	No repayment required

Financing a buyout requires careful planning, from understanding your business valuation to structuring payments that fit your cash flow. By exploring these options, you can find the best fit for your renovation firm while keeping your finances stable.

How to Buy Out Your Partner with an SBA loan

1. Use SBA 7(a) Loans as Your Main Financing Option

SBA 7(a) loans are a solid choice for financing partner buyouts in renovation firms. They’re tailored to handle the challenges of these transactions, especially when it comes to financing intangible assets like goodwill, client lists, and name recognition. These intangibles often make up a big part of a renovation company’s value, alongside physical assets.

"SBA 7(a) loans are the financing of choice for partner buyouts." - Avana Capital

These loans can provide up to $5 million in funding, with repayment terms stretching up to 10 years for business-related financing and up to 25 years if real estate is involved. Interest rates, as of February 2026, generally fall between 7.25% and 9.75%. Plus, they’re fully amortized, meaning there’s no balloon payment waiting for you at the end.

Another perk? Flexible equity requirements. If your business has a debt-to-net-worth ratio of 9:1 or lower, you might qualify for 0% down. For higher ratios, a 10% down payment is usually required. On top of that, SBA fees can be rolled into your monthly payments, reducing the need for upfront cash.

However, there are specific ownership rules to keep in mind. The buyout must result in the remaining partner(s) owning 100% of the business - partial buyouts don’t qualify. The exiting partner must leave completely, with no ongoing role in the company. Before applying, make sure you’ve got a third-party business valuation, a detailed succession plan for running the business solo, and a clear understanding of your debt-to-net-worth ratio to figure out your down payment needs.

2. Consider SBA 504 Loans for Real Estate and Equipment Purchases

If your business relies heavily on physical assets, an SBA 504 loan could be a great financing option. These loans are specifically designed to fund tangible assets like commercial real estate, land, and long-term machinery. This makes them particularly useful when a partner's buyout involves significant physical property or equipment ownership.

As of February 2026, fixed interest rates for SBA 504 loans range from 5.67% for 10 years to 5.80% for 25 years. The loan structure requires a 10% down payment, with the remaining amount split between a bank (50%) and a Certified Development Company (CDC) (40%). Plus, there are no balloon payments to worry about.

"The 504 loan can be the best choice when there is a partner buyout of the real estate and/or equipment."
– Angie Sweatman, BDO, First Capital Finance

While these loans are excellent for tangible assets, they do have limitations. SBA 504 loans cannot be used to finance intangible assets like goodwill, customer lists, or business stock. If your buyout involves these types of assets, you might need to pair a 504 loan with an SBA 7(a) loan to cover those additional costs. For example, in September 2023, a retail furniture business used an SBA 504 loan structure to buy out a majority partner’s $280,000 stake in real estate appraised at $1,500,000. The financing included a $700,000 first mortgage, a $600,000 interim loan, and $200,000 in buyer equity.

One key eligibility requirement: your business must create or retain jobs to qualify. With its low down payment and predictable monthly payments for up to 25 years, an SBA 504 loan allows you to preserve working capital while aligning payments with your cash flow.

3. Get an Accurate Business Valuation Before Seeking Financing

Understanding your renovation business's worth is a crucial first step before approaching lenders. A proper valuation not only sets the groundwork for negotiations but also reassures lenders that your business can handle the financial strain of a partner buyout.

Lenders rely on your valuation to calculate the debt-to-net-worth ratio, which directly impacts your financing terms. For instance, with SBA 7(a) loans, a ratio of 9:1 or lower can qualify you for 100% financing with no down payment. However, if the ratio exceeds 9:1, you’ll typically need to contribute 10% upfront. In essence, your valuation isn’t just a formality - it’s the backbone of your financing plan.

"Determining the worth of your company is perhaps the most challenging aspect of buying out a partner."
– Avana Capital

Choosing the right valuation method is key to building a strong financing strategy. Here are the three most common approaches:

• Asset-based approach: This method calculates the fair market value of your tangible assets, subtracting liabilities.
• Market-based approach: This approach looks at sales of similar businesses and industry benchmarks to estimate value.
• Income-based approach: Here, the focus is on historical and projected income to determine worth.

To ensure accuracy and trust, many businesses hire third-party experts like CPAs or professional appraisers for independent analyses that both partners and lenders can rely on.

Don’t forget to check your partnership or operating agreement. Many include a "buy-sell" clause that outlines a specific valuation formula or process. If no such clause exists, a financial advisor can help you gather current financial statements and identify liabilities that could influence the final valuation. Once the valuation is complete, document it thoroughly in your buyout agreement, including the calculation method used. This not only minimizes future disputes but also instills confidence in lenders, increasing your chances of securing financing.

4. Use Seller Financing to Lower Your Loan Amount

Seller financing offers a flexible option alongside traditional SBA loans. In this setup, the departing partner essentially becomes the lender, allowing you to pay off their equity over time. It's a widely used method for small business transitions, accounting for 60% to 80% of buyouts. For renovation firms, this approach helps maintain critical working capital.

"Seller financing turns the departing partner into the lender, enabling you to gradually acquire their stake as the company grows."
– Avana Capital

Typically, seller financing involves a 30% down payment, followed by installment payments spread over 5–7 years. The interest rates, often set at Prime plus 1%–2%, are generally lower than SBA 7(a) loan rates. Payments can also be timed to align with seasonal revenue cycles, making it more manageable for businesses with fluctuating income.

One major advantage of seller financing is reducing the amount you need to borrow externally, which eases your debt load. For example, if your renovation firm is valued at $500,000 and the departing partner agrees to finance $200,000, you'd only need $300,000 from other sources. This smaller loan means lower monthly payments and less pressure on your cash flow. Additionally, seller financing may count as part of the equity injection that many lenders require.

To ensure a smooth process, include key documents like a promissory note, security agreement, and updated operating agreements. Structure the payments so they use no more than 25% to 40% of your free cash flow, helping you retain enough capital to run the business effectively. Non-compete and non-solicitation clauses are also essential to safeguard client relationships and prevent future competition.

With seller financing reducing your reliance on external loans, you can explore other funding options to further strengthen your financial position.

5. Look at Hard Money Loans for Fast Funding

If you're looking to speed up a partner buyout, hard money loans could be the solution. These loans are backed by assets like real estate or equipment and provide quick access to funds compared to the longer timelines of SBA loans. This makes them particularly useful when time is of the essence or when traditional financing isn't an option due to limited business history or credit issues. For businesses with valuable assets like an office building or warehouse, leveraging that collateral can generate the funds needed to complete the buyout promptly.

The key benefit of hard money loans is speed. While SBA loans can take months to finalize, hard money lenders often process approvals and disburse funds in a matter of days or weeks. In some cases, approvals take as little as 10 minutes, and funds can be available within 48 hours. This rapid access can be a game-changer, especially in situations where a business partnership has deteriorated, and both parties want a swift resolution.

"Other options would be to leverage hard assets in the business, particularly real estate. Borrowing against a building is an effective way to generate bank proceeds." – Paul Wormley, General Partner, Hadley Capital

However, this convenience comes with trade-offs. Hard money loans typically have higher interest rates and fees compared to SBA 7(a) loans, which currently range from 7.25% to 9.75%. The repayment terms are also shorter - often just a few years instead of the 10 to 25 years offered by SBA programs. Moreover, traditional banks are often hesitant to finance partner buyouts, as they may not see the removal of a partner as a move that adds value to the business.

To mitigate these costs, consider using hard money loans as a temporary solution. Close the buyout quickly with a hard money loan, and once the dust settles, refinance with a lower-interest SBA 7(a) loan. This approach allows you to act fast while eventually locking in more manageable long-term rates. Just ensure that your business can handle the higher monthly payments during the interim period.

6. Tap Into Home Equity if You Own Property

If you own property, tapping into home equity can be a way to finance a partner buyout. This option is particularly useful for renovation firms that show growth potential but lack sufficient business assets to secure funding. By using a home equity loan or line of credit, you can access the funds needed to make a lump-sum payment to the departing partner.

One of the main benefits of this approach is its accessibility. Traditional banks often hesitate to approve partner buyout loans due to the perceived risks involved. By leveraging the equity in your personal residence instead of relying on business assets, you can bypass these limitations and secure the financing you need.

"Owners who own their home can borrow against it to buy out a partner instead of using it for home improvements or debt consolidation. However, a home equity loan can be risky because responsibility for the debt rests in the owner, not the business."
– Saratoga Investment Corp

That said, this method comes with a significant downside: personal liability. Unlike business loans such as SBA 7(a) loans, which tie the debt to the business, home equity loans place the responsibility squarely on the homeowner. If your business struggles after the buyout, your home could be at risk of foreclosure.

Before committing to this route, consult with a business accountant to ensure your projected cash flow can comfortably handle the added debt. Only proceed if you're confident in your firm's financial stability and your ability to manage the personal responsibility of the loan. Additionally, consider exploring flexible payment structures to help reduce the strain of repayment.

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7. Set Up Installment Payments Over Time

Creating a plan for installment payments can make the buyout process more manageable. Instead of paying your departing partner in one lump sum, you can arrange for payments to be spread out over 5–7 years. This strategy is widely used in small business buyouts, especially for renovation firms, as it helps maintain working capital during the transition period. While seller financing minimizes the need for external debt, installment payments focus on breaking down the buyout into scheduled payments, preserving cash flow without turning the seller into a lender.

A typical arrangement involves a 30% down payment, followed by regular installments - monthly, quarterly, or annually - over 5–7 years, with interest rates set at Prime plus 1%–2%. To avoid financial strain, it’s important to ensure these payments don’t exceed 25% to 40% of your available free cash flow. For businesses like renovation firms, where revenue may fluctuate seasonally, aligning payment schedules with peak cash flow periods can help maintain stability.

To formalize the agreement, use a promissory note that outlines key details such as the principal amount, interest rate, payment schedule, prepayment terms, and security measures. Departing partners may require certain safeguards, including a lien on the ownership interest being purchased, personal guarantees from the remaining owners, and life insurance policies on key partners. Adding provisions that allow for payment deferrals or reductions during tough financial periods can also provide flexibility.

This approach can also offer tax benefits for the seller. Under IRC Section 453, gains can be reported proportionally as payments are received, potentially keeping the seller in a lower tax bracket by spreading out their tax liability in line with actual cash flow. For buyers, the ability to fund the buyout using future operating profits reduces the need for external loans, making this a practical and cash-efficient option.

8. Bring in Outside Investors for Equity Financing

Equity financing offers a different approach to funding a partner buyout by exchanging ownership for growth capital. Instead of taking on debt, this method involves selling the departing partner's shares to an outside investor. This provides the exiting partner with cash while giving your business the funds it needs to grow.

Unlike loans, equity financing doesn't come with monthly payments or interest charges. However, it does mean sharing decision-making power with the new investor.

"If an investor buys your partner's equity, they are now a legal partner in your business. Unfortunately, this can be detrimental to your business' independence; all decisions must be made with the new partner's consent." – Avana Capital

This highlights a key trade-off: while you gain capital, you also give up some control over the business.

Many business owners look for investors who bring more than just money to the table. Expertise in your industry can be a major advantage. As noted by SBA7a.loans:

"In most cases, the other partner(s) will want the new partner to have some kind of expertise or experience in the industry that can help bring value to the business." – SBA7a.loans

For a renovation firm, this could mean finding someone experienced in areas like construction management, real estate development, or supplier networks - skills that can help take your business to the next level.

Equity financing can be a smart choice if you want to avoid the debt burden of traditional bank loans or if SBA loan requirements don't align with your needs. For instance, SBA loans often require a full buyout, which might not work if you're only purchasing part of a partner's stake.

Before bringing in an outside investor, ensure your financial records are in order and have a clear succession plan in place. Potential investors will want to know how the business will thrive without the departing partner. This approach provides a way to fund a buyout while avoiding the constraints of monthly loan payments.

9. Check Your Debt-to-Net-Worth Ratio Before Applying

Your debt-to-net-worth ratio plays a key role in how lenders assess your eligibility for a partner buyout loan. This ratio measures your firm's liabilities in relation to its net worth. To find this number, divide your firm's total liabilities by its net worth (calculated as total assets minus total liabilities).

For those considering an SBA 7(a) loan - the most common option for partner buyouts - this ratio has a direct impact on your down payment. If your post-buyout debt-to-net-worth ratio is 9:1 or lower, no equity injection (down payment) is required. However, if the ratio exceeds 9:1, the SBA mandates a minimum 10% down payment on the purchase price. These guidelines, revised in 2018, have made partner buyouts more attainable for many businesses.

Before you apply, calculate this ratio based on your projected balance sheet after taking on the new loan. Since a buyout adds debt without immediately increasing assets or revenue, your ratio could end up higher than expected. To ensure accuracy, review your financial statements with an accountant and document all liabilities.

If your ratio exceeds the acceptable threshold, take proactive steps to lower it before applying. Consider paying off existing business debt or retaining earnings instead of making large owner distributions in the months leading up to your application. Another option is to negotiate with the departing partner to accept company assets - like vehicles or equipment - as part of their payout. This reduces the loan amount you’ll need to secure. Getting a professional business valuation can also help accurately calculate your net worth, which may improve how lenders perceive your financial standing.

Understanding and managing your debt-to-net-worth ratio is critical to shaping your financing strategy for a partner buyout.

SBA 7(a) Buyout Terms	Condition
0% Equity Injection (Down Payment)	Post-buyout debt-to-net-worth ratio is 9:1 or less
10% Equity Injection (Down Payment)	Post-buyout debt-to-net-worth ratio is greater than 9:1
Maximum Loan Amount	Up to $5,000,000
Repayment Terms	10 to 25 years

10. Mix Multiple Financing Sources for the Best Deal

Relying on just one loan can put a strain on your cash flow. Instead, combining multiple financing sources can help you balance costs and risks while maximizing your borrowing potential. This strategy works particularly well if your business owns tangible assets like real estate or equipment alongside intangible assets such as client lists or brand reputation. By mixing financing options, you can create a well-rounded capital structure to support your goals.

For example, you can pair an SBA 504 loan with an SBA 7(a) loan to cover different needs. The SBA 504 loan, ideal for fixed assets like real estate and equipment, offers long-term fixed rates (around 5.67%–5.80% for 10–25 years as of February 2026). Meanwhile, the SBA 7(a) loan, with rates ranging from 7.25% to 9.75%, can handle intangible assets like goodwill, receivables, and working capital.

"You could combine the two types of government-backed financing though, purchasing real estate and equipment with a fixed-rate SBA 504 loan and then using a variable rate SBA 7(a) to buy out the remainder of your partner's equity." - AVANA Capital

Another option is seller financing, where the departing partner accepts a promissory note instead of immediate cash. This reduces your need for external loans and often comes with flexible terms. For instance, payments can be structured around your business's seasonal cash flow, such as higher payments during busy spring and summer months and lower payments in slower winter periods.

If your debt-to-net-worth ratio exceeds 9:1, you may need to contribute 10% equity. In such cases, bringing in an outside investor for a minority stake can help. This approach reduces your debt load and preserves working capital, though it does mean sharing profits and decision-making authority in the future.

Financing Type	Best Used For	Typical Rate (Feb 2026)	Key Advantage
SBA 504 Loan	Real estate, heavy equipment	5.67%–5.80% fixed	Fixed rates for long-term stability
SBA 7(a) Loan	Goodwill, receivables, working capital	7.25%–9.75%	Covers intangible assets, high borrowing flexibility
Seller Note	Bridging valuation gaps	Negotiable (often Prime + 1–2%)	Reduces external borrowing, flexible repayment options
Equity Investor	Lowering debt-to-net-worth ratio	N/A (ownership stake)	No repayment required

Financing Options Comparison

Choosing the right financing depends on your firm's assets, timeline, and cash flow requirements. Each option comes with its own approval process, interest rates, and terms.

SBA 7(a) loans are a flexible choice for renovation businesses, as they cover both tangible assets and intangibles like goodwill, client lists, and brand value. Interest rates range from 7.25% to 9.75%, with terms stretching from 10 to 25 years. However, the approval process can take 2 to 4 months and requires strong credit and detailed financial documentation.

SBA 504 loans are designed for fixed assets, such as real estate and heavy equipment. These loans offer fixed interest rates between 5.67% and 5.86% and terms of 10, 20, or 25 years. As Angie Sweatman explains:

"The 504 loan can be the best choice when there is a partner buyout of the real estate and/or equipment".

However, SBA 504 loans cannot be used for intangibles like goodwill or receivables. In those cases, pairing it with an SBA 7(a) loan might be necessary.

Seller financing provides a quicker approval process with flexible terms. Payments can be adjusted to match seasonal cash flow, and interest rates are often lower than traditional bank loans, making this a practical option for amicable business transitions.

Hard money loans are ideal for situations requiring fast funding, offering approval in as little as 3 to 7 days. However, they come with higher interest rates and shorter terms, typically 1 to 3 years.

Here’s a quick summary of these options:

Financing Method	Approval Time	Loan Terms	Interest Rates (Feb 2026)	Ideal For
SBA 7(a)	2–4 months	10–25 years	7.25%–9.75% (Variable)	General buyouts, including intangibles
SBA 504	30–90 days	10, 20, or 25 years	5.67%–5.86% (Fixed)	Real estate, showrooms, or heavy equipment
Seller Financing	Immediate	Flexible (Months–Years)	Negotiable (Often lower)	Transitions with payments tied to future profits
Hard Money	3–7 days	1–3 years	High	Urgent funding needs
Equity Financing	Varies	Permanent (Ownership)	N/A (Share of profits)	Avoiding debt while sharing control

For renovation firms with diverse needs, combining financing methods can be a smart strategy. For example, using an SBA 504 loan for fixed assets like real estate alongside an SBA 7(a) loan for intangibles can help balance fixed and variable rates while optimizing borrowing capacity.

Conclusion

Financing a partner buyout requires a well-thought-out strategy that matches your firm's financial position and long-term goals. Joel Teklu of Amini & Conant captures the essence of this process:

"Buying out a business partner is like a divorce of sorts: partner buyouts can be emotional, complex, and pivotal for your firm's future".

The key to success lies in finding the right financing mix that maintains your working capital while ensuring the business thrives after the transition.

If your buyout involves physical assets like real estate or heavy equipment, an SBA 504 loan (with rates between 5.67% and 5.86%) offers the stability of fixed payments. For less tangible needs, such as goodwill or intellectual property, an SBA 7(a) loan (7.25%–9.75%) provides the flexibility to adapt to changing needs. Many renovation firms find that combining multiple financing options helps create an optimal capital structure, ensuring smoother cash flow management.

Seller financing remains a popular choice, playing a role in 60% to 80% of small business buyouts. It often offers flexible terms that can align with fluctuating revenue cycles. Keeping payment levels manageable is essential to preserving your working capital during and after the transition.

To simplify this intricate process, Clearly Acquired specializes in structuring buyout financing. They connect businesses with lenders using precise underwriting criteria, helping navigate requirements like the 9:1 debt-to-net-worth ratio, which may dictate the need for a down payment. They also design capital stacks that combine multiple funding sources, ensuring the best possible terms.

Whether you're aiming for a smooth transition or need a decisive separation, having professional support can ensure you secure the right financial structure to safeguard your firm's growth and stability.

FAQs

How do I choose between SBA 7(a) and SBA 504 for a buyout?

When deciding between an SBA 7(a) loan and an SBA 504 loan, it all comes down to how you plan to use the funds and the type of assets involved.

SBA 504 loans are a great option if you're looking to finance fixed assets such as real estate or equipment. They come with long-term, fixed interest rates, making them a solid choice for large, stable investments.

On the other hand, SBA 7(a) loans are much more flexible. They can cover a broader range of needs, including working capital or intangible assets, like purchasing a business or refinancing debt.

To choose the right loan, think about the type of assets you're financing, the loan terms you need, and your overall financial goals. Each loan serves a distinct purpose, so aligning your choice with your specific needs is key.

What documents do lenders need for a partner buyout loan?

When applying for a partner buyout loan, lenders typically need several key documents. These include legal agreements, business valuation reports, and financial statements. If you're pursuing an SBA loan, additional requirements may include evidence of business assets, real estate, and fixed assets. Moreover, personal guarantees are often mandatory for owners with 20% or more equity in the business.

To make the approval process smoother, it's crucial to ensure all your documentation is both accurate and current. Proper preparation can save time and help avoid unnecessary delays.

How can I lower my debt-to-net-worth ratio before applying?

To bring down your debt-to-net-worth ratio, the key is tackling debt and building your net worth. Start by paying off high-interest debts first - they tend to drain your finances the fastest. At the same time, focus on reinvesting any profits and growing your assets through consistent savings or smart investments.

Keeping detailed financial records and conducting regular valuations of your assets can help you present a stronger financial position. Plus, improving your cash flow and cutting down liabilities not only strengthens your ratio but also boosts your chances of qualifying for financing options like SBA loans, which often have specific ratio requirements.