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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Benefits and Drawbacks

This section highlights the pros and cons of SBA loans for partner buyouts versus traditional acquisitions. The table below provides a clear comparison of these two approaches.

Partner Buyout Advantages

One of the main perks of using SBA loans for partner buyouts is the flexibility in equity requirements. These transactions are often simpler because the buyer is already familiar with the business's operations and financials. Additionally, SBA loans for partner buyouts typically don’t require collateral for loan amounts up to $5 million.

Traditional Acquisition Benefits

Traditional business acquisitions open up opportunities to invest in a wider range of businesses, spanning various industries and locations. This approach allows buyers to explore beyond existing partnerships. The process is also standardized, with a consistent 10% equity injection rule and established evaluation criteria, offering clarity and predictability in securing financing.

Key Challenges for Partner Buyouts

Partner buyouts aren’t without hurdles. Valuation disputes among partners can complicate the process, often requiring a third-party appraisal, which adds time and cost. Lenders may worry about how the business will operate after a partner exits. On top of that, all remaining owners are usually required to provide personal guarantees, increasing personal liability.

Traditional Acquisition Drawbacks

Traditional acquisitions come with their own set of challenges. The mandatory 10% equity injection can limit available capital. Buyers also face a more extensive and expensive due diligence process, as they must thoroughly evaluate an unfamiliar business, assess market conditions, and plan for a smooth transition. Because buyers are less familiar with the business, lenders may see these transactions as riskier, leading to stricter approval criteria.

Feature	Partner Buyout	Traditional Acquisition
Equity Requirements	May require 0% if the debt-to-net-worth ratio is 9:1 or less	Always requires a 10% injection
Transaction Speed	Familiarity with the business can lead to a smoother process	Extensive due diligence lengthens timelines
Risk Perception	Buyer's familiarity tends to lower perceived risk	Unfamiliar operations can be seen as higher risk
Personal Guarantees	All remaining owners are typically required to provide personal guarantees	Only owners with a 20% or greater stake must guarantee

The distinction in personal guarantee requirements underscores how familiarity with a business can reduce perceived risk and personal liability in partner buyouts.

Financial Considerations

Both approaches share some financial similarities. For example, they offer capped interest rates and extended repayment terms. Partner buyouts generally allow for a 10-year fully amortized term, while traditional acquisitions involving real estate may extend up to 25 years. SBA guarantees cover 85% of loans up to $150,000 and 75% for larger amounts.

Platforms like Clearly Acquired provide tailored guidance to help buyers navigate these complexities, whether they’re financing a partner buyout or pursuing a traditional acquisition.

Deciding between a partner buyout and a traditional acquisition ultimately comes down to factors like available capital, individual circumstances, and risk tolerance. Understanding the benefits and challenges of each option helps buyers choose the financing strategy that best aligns with their business goals.

Conclusion

SBA loan eligibility for partner buyouts stands out due to differences in equity requirements and risk evaluations. For instance, partner buyouts may skip the need for an equity injection if the business’s debt-to-net-worth ratio is 9:1 or lower, and the remaining owners have held ownership for at least 24 months. In contrast, other acquisitions generally require a 10% equity injection . Another key distinction is in guarantees: partner buyouts demand joint guarantees from all remaining owners, while other acquisitions only require guarantees from those holding a 20% or greater stake.

With SCORE estimating that 12 million businesses will change hands over the next 10–15 years, recent SBA rule updates aim to simplify loan use for partner buyouts and tackle challenges like negative equity scenarios.

Platforms like Clearly Acquired make these transactions smoother by offering a comprehensive toolkit and access to expert advisors. They assist buyers in navigating SBA loan eligibility for both partner buyouts and standard acquisitions. This approach highlights how strategic financing can help overcome common acquisition challenges.

Working with the right platform and experienced advisors can help you secure better SBA terms, minimize risk, and unlock growth opportunities.

FAQs

What are the benefits of using an SBA loan for a partner buyout compared to other business acquisitions?

Using an SBA loan to buy out a business partner comes with several advantages. For starters, the lower down payment requirements - sometimes as little as 10% - make it possible to secure funding without needing a large amount of upfront cash. This can be a game-changer for business owners looking to preserve their working capital.

Another benefit is the longer repayment terms that SBA loans typically offer, ranging from 7 to 25 years. These extended terms help ease the strain on cash flow by keeping monthly payments more manageable.

On top of that, SBA loans often come with competitive interest rates and flexible structures, making them a cost-effective option. Unlike many other financing methods, SBA loans are tailored to meet the needs of small business owners, focusing on affordability and setting the stage for long-term growth.

How does the debt-to-net-worth ratio affect SBA loan eligibility for a partner buyout?

The debt-to-net-worth ratio is a crucial factor when applying for an SBA loan to finance a partner buyout. Generally, this ratio shouldn't exceed 9:1 to qualify. If your ratio is higher, you might need to provide at least 10% equity or fulfill other conditions to get the loan approved.

Lenders use this ratio to evaluate your business's financial health and its ability to manage loan repayments. If a partner buyout is on your radar, take the time to carefully analyze your financials and collaborate with experts to ensure you meet the necessary requirements.

How can I keep my business financially stable after using an SBA loan for a partner buyout?

To ensure financial stability after completing a partner buyout with an SBA loan, start by crafting a well-thought-out business plan. This plan should clearly show how the buyout will benefit your company and include strategies for increasing revenue, managing expenses, and driving growth.

Keep a close eye on your debt by maintaining a healthy debt-to-net-worth ratio - aiming for 9:1 or lower is a good benchmark. Make sure you have enough collateral and personal guarantees to meet the loan's requirements. Regularly monitoring your business's financial health can help you spot and address potential issues before they grow.

If your loan involves assumptions or transfers, don't forget to get the necessary approvals from your lender. Staying organized and disciplined with your finances will help set your business on the path to long-term success after the buyout.