Can I use an SBA loan to buy out my business partner?
Short answer
Yes. In an Existing Owner Buyout, existing owners or employees buy another owner's entire stake and end up with 100%. The buyers must have actively participated for the last 24 consecutive months. Source: SOP 50 10 8.1, App. 15, Para. A.1.c.
Yes. SOP 50 10 8.1, Appendix 15, Para. A.1.c, treats this as an Existing Owner Buyout.
How it must be structured
- One or more existing owners or employees buy another owner's entire stake, ending with 100% ownership.
- Each buyer must have actively participated in operations for at least the last 24 consecutive months.
- The company and the acquiring owner must be co-borrowers and sign the note jointly and severally.
The company can instead redeem the partner's interest. The company is then the borrower, and the remaining owners follow SBA's standard guaranty rules.
The credit terms
- Coverage: 1.25:1 (Para. C.2.b).
- Equity: an outside buyer's Initial Acquisition needs 10%, which cannot be reduced or eliminated. A partner buyout starts at the same minimum, but the lender may reduce or waive it. It is measured on the purchase price of the business (Para. C.2.a).
- No Quality of Earnings report is required (Para. C.1.b).
- A business valuation is still part of the financial due diligence (Para. C.1.a).
If existing business debt is refinanced in the same deal, it must meet Appendix 14 (Para. A.3.a).
Someone original has to stay
At least one member of original ownership must remain and guarantee the loan, whatever their percentage, unless Appendix 15 says otherwise (Para. A.1.c).
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