SBA Loan Eligibility for Partner Buyouts

Looking to buy out a business partner? SBA loans might be your best option. They offer low down payments, long repayment terms, and flexible eligibility criteria - especially for partner buyouts. Here’s what you need to know:

• Equity Injection: You may not need to inject equity if the business’s debt-to-net-worth ratio is 9:1 or lower, and you’ve owned at least 10% of the business for 24 months.
• Personal Guarantees: Only partners with 20% or more ownership need to provide guarantees in partial buyouts.
• Debt-to-Net-Worth Ratio: The business must meet the 9:1 ratio before the ownership change.
• Partial Buyouts: Allowed under updated rules, but require third-party valuations and co-borrowers.
• Post-Transaction Viability: You’ll need to show the business can succeed after the buyout with a solid plan.

Quick Comparison: Partner Buyouts vs. Other Acquisitions

Feature	Partner Buyout	Other Acquisitions
Equity Requirements	May be 0% if debt-to-net-worth is 9:1 or less	Always 10% of project cost
Personal Guarantees	All remaining owners must guarantee	Only owners with 20%+ stake
Risk Perception	Lower due to buyer familiarity	Higher due to new ownership
Transaction Speed	Faster, thanks to familiarity	Slower, due to extensive due diligence

Bottom Line: SBA loans for partner buyouts are more flexible than loans for other acquisitions, making them an attractive option for existing business owners. Focus on meeting the debt-to-net-worth ratio, securing guarantees, and preparing a strong business plan to ensure approval.

How to Buy Out Your Partner with an SBA loan

1. SBA Loan Eligibility for Partner Buyouts

Partner buyouts come with terms that are often more favorable than those for traditional acquisitions. Updates to SBA rules in 2018 and changes introduced in May 2023 have made these buyouts easier to access. Here’s a breakdown of the key criteria and how they apply in practice.

Equity Injection Requirements

When it comes to partner buyouts, the equity injection requirement is determined by whichever is less: 10% of the purchase price or the amount needed to ensure the business has a debt-to-net-worth ratio of 9:1 or lower. If the buyer has actively owned at least 10% of the business for 24 months and the debt-to-net-worth ratio meets the 9:1 threshold, no equity injection is needed. This is a clear advantage over standard acquisitions, which typically demand a 10% equity injection of the entire project cost.

For example, Ginny successfully bought out Lesley’s share in their $920,000 escape room business in Sioux Falls, South Dakota. She secured an SBA 7(a) loan for $480,000 without needing an equity injection because the debt-to-net-worth ratio met the required standard.

If an equity injection is necessary, acceptable sources include unborrowed cash, personal loans, or seller notes on full standby. However, funds from the business’s existing balance sheet cannot be used.

Debt-to-Net-Worth Ratio

The debt-to-net-worth ratio plays a pivotal role in determining eligibility for a partner buyout. To qualify, the business’s balance sheets from the most recent fiscal year and current quarter must show a ratio no higher than 9:1 before the ownership change. If the SBA loan will finance over 90% of the purchase price, the remaining owner(s) must certify they’ve been actively involved in the business and maintained or increased their ownership for at least the past 24 months.

If the ratio exceeds 9:1, the borrower must lower it - either by injecting additional cash or by providing a 10% equity injection.

Personal Guarantees

Recent changes to SBA rules have also impacted personal guarantee requirements. For partial buyouts, only the remaining owners with at least a 20% stake are required to provide a personal guarantee. In full buyouts, however, all remaining owners must provide a personal guarantee, regardless of their ownership percentage.

Eligibility for Partial Buyouts

The SBA now allows partial ownership transfers under revised rules. For these transactions, both the small business and the individual acquiring the ownership interest must act as co-borrowers on the loan. Additionally, an independent third-party valuation is required to establish a fair value for the shares being purchased.

Post-Transaction Viability Standards

Ensuring the business remains viable after a partner buyout is a critical consideration. Lenders evaluate whether the business can continue operating successfully after a partner’s departure. Borrowers must show they can manage the business independently or have plans to bring in new leadership. A concise business plan outlining continuity and growth is typically required.

For instance, a home health care business with two equal partners facilitated a smooth transition when one partner retired. The remaining partner secured an SBA loan by meeting the debt-to-net-worth ratio requirement, demonstrating strong cash flow, and obtaining a third-party valuation to confirm the purchase price.

For businesses using services like Clearly Acquired, understanding these viability standards is essential when structuring partner buyout deals and preparing the necessary SBA loan documentation.

2. SBA Loan Eligibility for Other Business Acquisitions

When it comes to traditional business acquisitions, SBA loan requirements tend to be more stringent compared to partner buyouts. This difference often highlights the advantages of buyers who already have a connection or familiarity with the business.

Equity Injection Requirements

For acquisitions involving new ownership, the SBA mandates a 10% equity injection based on the total project costs. This rule applies universally, regardless of the business’s debt-to-net-worth ratio or whether the buyer has any prior involvement with the company. Buyers can fulfill this requirement using cash, seller notes placed on full standby, or a combination of the two.

There is, however, an exception for expansion acquisitions. If the target business continues operating under the same NAICS code, stays within the same geographic area, and retains its current ownership structure, it may qualify for an exemption from the equity injection requirement. These stringent standards set traditional acquisitions apart from partner buyouts, where criteria are often more flexible.

Debt-to-Net-Worth Ratio

Another major distinction lies in how lenders evaluate the financials. In traditional acquisitions, lenders focus on the pro forma financial position after the transaction. Unlike partner buyouts, the existing debt-to-net-worth ratio does not serve as a basis to waive the equity injection requirement. This means buyers in traditional acquisitions must meet the equity injection criteria regardless of the business's current financial health.

Personal Guarantees

For traditional acquisitions, the SBA requires personal guarantees from all individuals who own 20% or more of the business. Additionally, lenders may request guarantees from key executives or senior managers if their roles are considered critical to the future success of the company.

Post-Transaction Viability Standards

Traditional acquisitions undergo more intensive viability checks compared to partner buyouts. Since these transactions often involve entirely new ownership, lenders need to ensure the business will remain stable and successful post-acquisition. This includes evaluating the buyer’s industry experience, transition plans, and strategies for maintaining or improving the company’s performance. The SBA views these transactions as higher risk due to the lack of buyer familiarity, unlike partner buyouts where an existing relationship with the business reduces uncertainty.

For buyers using resources like Clearly Acquired to find acquisition opportunities, understanding these stricter requirements is crucial. Proper preparation can help ensure financing strategies are effective and timelines for completing the purchase remain realistic.

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