Grow Your Business

Financing Partnership Buyouts for Retirement using SBA Loans

Data suggest many business owners (those over 57 years old today) may be in the market to sell their businesses in the next 5 to 10 years. The resulting 1.3 to 2 million businesses for sale will create opportunities for business acquisition and buyouts. This SunTrust customer profile highlights how two business owners used the SBA 7(a) to finance an unexpected, but welcomed, buyout of an older partner who wanted to retire.

Tom Smith and Matt Bucknall were fifteen-year partners in a successful machine shop in the Southeast. They met while working together for a competitor’s business and got along well despite their twenty-year age difference. Matt, the younger of the two men, owned 45 percent of the company, and Tom owned 55 percent. Both Tom and Matt recognized that the time was approaching for Matt to buy out Tom, who was ready to retire. Tom and his wife wanted to move to the West Coast and retire to a planned retirement community where they could be near their adult children. They needed the cash out of the business to finance their move and purchase into the retirement community.

The business was strong and generated significant income. Their banker agreed to connect them with an internal banking resource for business valuation. The estimate projected Tom’s stock value at $1.5 million, an impressive number for Tom’s retirement projections, but a daunting one for Matt, who was still in the midst of educating his high school and college-aged children.

The partners talked to their advisors and SunTrust banker about their options. Matt did not have extra cash to personally buy out his partner. Both men felt that finding and absorbing a new partner was not a viable solution. Matt knew the business well, staff and systems were in place for an easy management transition; and both men felt good about the business’ future.

Their banker suggested the SBA 7(a) program as an attractive source of capital which could fund the transaction.

  • Unlike conventional loans, the SBA 7(a) program could be used to fund goodwill in the business.
  • SBA 7(a) loans allow the acquiring partner to put down just 25 percent of the deal value and finance the remaining 75 percent.
  • Business profit could easily repay the loan and allowed the exiting partner the freedom to exit the business – within one year as required - at no risk.
  • Business valuation met the minimum required value of the purchase price.

Tom and Matt were successful in their quest for a buyout largely because they had a strong working relationship with their banker who helped them identify the SBA 7(a) loan as an accessible financing vehicle. Together with their banker, they were able to:

  • Move forward with a business valuation
  • Calculate the capital need
  • Project the impact of the financing cost on the business financials
  • Match the timeline of the need to the ability of the business to sustain the financing

For existing or potential ownership partnerships, the ability to use the SBA (7) loan to finance goodwill and restructure business ownership can be a strategic opportunity. Consider how your business might benefit from a capital infusion for ownership restructuring or business acquisition.

If you do not already have a point of view on these issues, talk to your advisors about how you might use capital and construct a simple, back-of-the-envelope plan to meet your business goals.   This simple approach will equip you with the information you need to explore options and assess your fit with the most attractive programs.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.