Small Business

How to finance a partnership buyout

If you and your business partner agree to go your separate ways — and you want full ownership of the company — you’ll probably decide to initiate a partner buyout. Beyond agreeing on the terms of the buy and sell agreement, however, the biggest issue you’ll likely face is financing.

Partner buyouts can be expensive, and depending on the financial health of your business, you may not have enough money to pay out of pocket. If that’s the case, you’ll need to consider financing solutions.

Most partner buyouts are funded using either equity or debt. With equity financing, you’re raising capital by selling either some or all of your partner’s shares and interest to private investors. If you go this route, you essentially trade your business partner for another partner, though, meaning you don’t have complete ownership. With debt funding, on the other hand, you borrow money to increase your share of ownership and remove your partner from the equation.

Debt funding is more common, but it’s also more difficult to secure financing this way, since new debt doesn’t directly benefit the business. Without a guarantee that a partner buyout — and the extra financing it requires — will immediately help the business grow or turn a profit, many banks are reluctant to issue loans funding buyouts.

You still have several options for financing beyond applying for a traditional bank loan, though. Here are three strategies to consider:

1. Self-fund the buyout.

Many business owners opt to self-fund their partner buyout. With this method, the leaving partner acts as a lender whom you pay over a set amount of time. This is a good route to take if you and business partner have an amicable relationship and set clear terms surrounding payment.

If, however, you have a tense relationship with your business partner, you may not want to prolong the buyout process by continuing to pay little by little.

2. Apply for an SBA loan.

The Small Business Administration (SBA) backs certain types of loans that allow business owners to fund partner buyouts. One such type is the 7(a) loan, designed to help entrepreneurs start a business or expand an existing business through a strategic move such as a partner buyout or acquisition.

Getting approved for this type of loan, however, requires careful planning. In addition to having solid financials, you’ll need to develop a post-exit strategy and explain how you’ll run the business effectively on your own. This application process, combined with the amount of time it takes to get approved and receive the funds, can take several months, so it may not be the best option if you need to act quickly.

3. Try alternative lenders.

Another option is getting a loan from a peer-to-peer lender like Funding Circle. Our business loans were designed by small business owners to help other small business owners thrive.

We pride ourselves on a fair, transparent pricing structure and rates that are competitive with traditional bank loans. You can borrow anywhere from $25K to $500K over six months to five years, with interest rates starting at just 4.99%. The best part: you can apply in just 10 minutes and get a decision in as little as 24 hours after document submission.

With us, you’re not just another number. We care about helping you grow your business — and we know fast, affordable financing can help you do that.

Another way forward

If you’re struggling to secure enough financing to fund a partner buyout, you may have to consider alternative options. Instead of buying your partner’s share of the business, for instance, you could legally dissolve your partnership. Or, you could redistribute your partner’s responsibilities and shares, so you assume the majority role.

Both these choices require careful legal considerations. A dissolution is a good option if you want to end the partnership completely, but it also means you’ll have to terminate your business and divide up the remaining assets. Redistributing your roles, on the other hand, allows you to keep the business running, but requires you to continue working with your partner to some extent.

If you’re ready and able to proceed with a partner buyout, here’s what you need to know to make it a success.

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