SBA Partner Buyout loans are available via the 7a program, and there are a few specific rules for transactions for when you want a loan to buyout a business partner.
SBA Loan Partner Buyout Rules
The first rule you need to understand is not so much a rule as an exclusion and that is that the SBA does NOT allow earnouts.
As of August 1, 2023 the SBA now allows “partner buy-ins” with certain requirements as outlined below.
SBA Maximimum Loan for Partner Buyout
The maximum SBA loan amount for a buyout – for most lenders – is $5 million, as there are some lenders who will “piggyback” a 2nd unguaranteed loan of up to $4 million behind a $5 million 7a first making $10 million buyouts
Partner buyout financing is categorized under the SBA’s rules for “Changes of Ownership” and the guidelines are quite simple.
If the owners of a business are looking to buyout an existing owner, and if the remaining owner(s) are looking to accomplish the buyout without coming out of pocket any cash then the owner(s) who will continue on with the business must certify the following:
- that he/she has been actively participating in the operation of the business and has held the same or an increasing ownership interest in the business for at least the last 24 months.
- In addition, the balance sheets of the business must show a “debt to worth” ratio of 9:1 or less for the current quarter as well as the most recent fiscal year.
If the above requirements cannot be met then the remaining owner(s) must come up with a 10% cash equity injection/down payment on the agreed upon price of the buyout. Keep in mind, the SBA is fairly flexible with regard to where the down payment or equity injection can come from.
SBA Partner Buyout
The reasoning behind the SBA’s rule and documentation requirements is part of an effort by the SBA to make sure a business is sound enough to withstand the loss of a partner – who, theoretically is a major reason for the success of a business.
It is also to make sure the business is not carrying too much debt.
The balance sheets will reveal current and recent liabilities, so a lender can be relatively sure that the remaining partners are not taking on additional debt to complete the buyout of the partner.
These are the only specific rules for an SBA partner buyout financing that are outlined in the SBA “underwriting manual,” but all other SBA rules would apply to any transaction where there is a change of ownership.
SBA Partner Buyins
As of August of 2023 the SBA allows a “partial change of ownership,” meaning the current owner can stay on as a director, officer, owner, stockholder, key employee, or (regular) employee.
This is a change from a rule that has long been in place for when a business changes hands, in that, it used to be that there was no such thing as a partner buyin and if a seller sold they would have to fully exit the business.
The same two partner buyout requirements for down payment (or lack thereof) as noted above also apply for buyins.
You may want to review our SBA 7a Loan Requirements page to get a full understanding of most of the relevant rules as they apply regardless of the type of transaction.
SBA Business Loan Change of Ownership Rules & Benefits
Below are some guidelines and benefits that pertain to an SBA business loan partner buyout:
- SBA Partner Buyout loans have a term of 10 years.
- There is no prepayment penalty, so you are free to refinance at any time, to pay as much extra principal as you desire to pay a loan off early, or to sell the business and pay off the loan without a penalty.
- Borrowers need decent credit. “Decent” is in the eyes of the lender. Technically, there is no minimum credit score dictated by the SBA for most of these loans, so it is up to an individual lender as to what they are willing to accept. We have some good info re: what kind of credit it takes to qualify as well as how lenders look at past bankruptcies on our blog here.
- Closing costs are financed into the loan. Borrowers always need to pay for any reports that need to be ordered prior to closing as part of a partner buyout (or any other kind of transaction), but things like business valuations are considered a “finance-able” cost, so some lenders allow a credit back to you at closing for any out of pocket costs paid prior to closing.
- If there is any (51% or more owner-occupied) company-owned real estate and it is included as part of the buyout AND if the real estate is worth more than the business, then you can finance the real estate AND the buyout over a full 25 years. If you need information re: financing a business property with no down payment, then you might want to visit this page: 100% commercial property financing.
- As mentioned above, earnouts are not allowed as a form of buyout per SBA rule.