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Can You Use an SBA Express Loan to Buy Out a Partner?

Yes. The SBA Express loan is a fantastic way to buy your partner’s share of a business. Whether they’re leaving due to retirement, the desire to move somewhere else, or simply want to try starting a business in a new industry, SBA Express loans can get you up to $350,000 in funds to execute a partner buyout.

When It Comes to Buyouts, Business Valuation is Key

  • The first step in a successful partner buyout is determine the actual worth, or value of the business. Even if you have a good idea what you think your business worth, your partner (or partners) may not necessarily agree, which is why it’s essential to discuss this in depth before agreeing to anything. If you and your partner(s) cannot agree on a value, it may make sense to bring in a third-party expert to set the record straight.

Different Ways to Buy Out Your Partner

There are several common ways to buy out your business partner, but not all of them are permitted under SBA loan rules. In general, the SBA will allow you to use loan funds for:

  • Lump-sup buyouts: The most efficient (but also most expensive) form of buyouts, this simply involves paying your partner one large sum to leave the business.

  • Buyouts over time: In this scenario, the partner leaves the business, and you agree to make a series of payments over time to repay them for their equity.

There are also several common buyout methods that are not allowed under SBA loan rules. These include:

  • Equity buyouts: This is when a new partner comes into a business and purchases the previous partner’s stake. Since SBA loans cannot be used to buy part of a business, the new partner would have to bring cash or find non-SBA financing in order to complete the transaction.

  • Earn-outs: Earn-outs occur when the leaving partner gets payments for the business over time, but also must stay with the business for a specific time period in order to ensure a smooth transition. In most cases, the leaving partner’s payments are based on the company’s performance during the transition period.

  • Employment contracts: In this situation, the exiting partner has sold their share of the business, but remains in an important leadership position with the company. Like equity buyouts and earn-outs, this is not allowed by the SBA. According to SBA rules, an exiting partner cannot remain as a board member, principal, or key employee of a firm once they have sold their share of the business.