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Buying Out a Business Partner With a 504 Loan

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Depending on the circumstances, buying out a business partner can be an emotional and stressful experience. Even if the decision was made on good terms, you still need to consider factors like fair value, taxes, legal implications, and, of course, funding. One financial resource many may not be aware of when it comes to buying out a business partner is the SBA 504 loan. The SBA 504 loan can help with the purchase of real estate holdings, equipment, and other fixed assets associated with the buyout. This can offset a huge portion of the final acquisition costs. 

What Does It Mean to “Buy Out” A Business Partner?

When a company is owned by one or more people, each has a share or stake in the business. They may also have separate real estate holdings or maintain ownership of other fixed assets, such as machinery and furniture. Should a partner decide to leave, the other partner or partners may wish to buy their share, the building in which the business operates, certain equipment, etc. This is called “buying out” a partner. The departing owner essentially transfers ownership to the other partner(s). 

When Do Buyouts Most Often Occur?

Business partner buyouts occur for various reasons, some amicable, and some not. Some examples of when a buyout might be necessary include:

  • One partner is retiring
  • Partners disagree on business goals
  • Personal disagreements between partners
  • A partner is offered a job elsewhere
  • Family issues
  • Health issues

What Preparation is Needed When Buying Out a Business Partner?

You can streamline the buyout process by making a few preparations. That way, when it comes time to draw up paperwork, you can be sure things go smoothly. 

Refer to Your Buy and Sell Agreement

Ideally, you should have drawn up a Buy-Sell Agreement when you first started your business. This type of agreement includes protocols for voluntary or involuntary exits from the company, as well as valuation clauses and other guidelines in the case of a buyout. It can be extremely helpful and protect the business from risks and costs associated with disgruntled former partners. 

If you do not have a Buy-Sell Agreement, it is not necessarily a deal breaker. However, it can complicate matters, especially if the buyout is occurring under less than harmonious terms. If this is the case, you may need to involve a business attorney to help moderate the process.

Consult With An Attorney

Even if partners are in general agreement, you will probably want to consult with a qualified business attorney to make sure you are adhering to all legal regulations associated with buying out a business partner. A non-biased party can also help maintain objectivity during the finalization process.

Financing Options for Buying Out a Business Partner

In general, you have three courses of action for buying out a business partner:

Self-Funded

If you have the capital, you can buy your partner’s share outright using your own funds. This can be ideal if you want to avoid interest payments associated with a loan or future balloon payments. Of course, not many business owners have this much cash on hand, especially if they intend to buy a partner’s shares and real estate holdings.

Partner Buyout Financing

Another way to afford buying out a business partner is through the departing owner. He or she may agree to take scheduled payments over a period of time. This is appealing primarily to the former partner, who can collect interest payments on top of the principal owed. 

Business Loans

One of the best ways to finance buying out a business partner is with a small business loan. The SBA has two main types of loans for small business owners: the 7a and the 504. 

The SBA 504  loan allows eligible business owners to claim up to $6 million in financing for fixed assets, which includes buying real estate. This means you can use the SBA 504 to purchase a building from your partner, as well as any equipment and furnishings previously owned by them.  

Keep in mind that you cannot use the SBA 504 to purchase your partner’s shares or stock in the company. It is only available for fixed assets. In the case of a buyout, this will be limited to the building or buildings owned by the partner who is leaving. You can also use the funds secured through the 504 to purchase additional real estate and equipment to expand the business once you have completed the buyout. 

The SBA 504 is particularly attractive compared to partner buyout financing or conventional loans. This is for a few reasons:

Longer repayment terms: you have up to 25 years in most cases to repay 504 loans associated with real estate acquisition. That is far longer than most traditional loans for commercial real estate. 

No balloon payments: many conventional commercial real estate loans include a balloon payment at the end of the loan period. This can be a tidy sum for some business owners, who may be unable to pay the final amount. The 504 loan does not utilize the balloon payment model, which gives business owners peace of mind regarding any unexpected repayment amounts.  

Fixed interest rates: the 504 loan is also fixed, which means you won’t have any changes to your monthly payment without your knowledge. 

Low down payment: the SBA 504 loan generally requires a lower down payment than conventional commercial real estate loans. You also will not be risking any personal collateral, since the assets you are acquiring will be used to secure the loan. 

Special Considerations When Using the SBA 504 for a Buyout

In addition to using the SBA 504 loan for fixed assets only, you will need to keep the following in mind to determine if you are eligible for this type of loan:

You Must Be A Small Business

In order to qualify for the SBA 504 loan, you must meet the sizing regulations set forth by the federal government. Net worth cannot exceed $20 million, and net income after Federal taxes (for 2 years prior) must be less than $6.5 million. 

You Must Be For Profit and Based in the US

Business owners applying for the SBA 504 must run a for-profit organization that operates within the continental US. 

The Acquisition Must Create or Maintain Jobs

If you wish to use the SBA 504 to purchase your business partner’s real estate holdings or other fixed assets, it cannot come at the expense of existing jobs (other than the departing owner). You must at least maintain current employee status and, ideally, open space for new jobs upon completing the acquisition. 

Help Buying Out a Business Partner in Colorado

If you need help securing a loan to purchase your former business partner’s fixed assets, contact CEDCO.org today. We are a highly experienced certified development company with a passion for assisting Colorado’s diverse and enterprising business owners. Call or go online today to set up a free consultation. 

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