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icture this: After many years of running a successful distillery, you and your business partner have come to a crossroads in your professional relationship. It’s time to part ways. You’d like to buy your partner’s share of the business, but you’re unsure how to go about it. Securing the funds for a business partner buyout has been a common hurdle for many — until a few years ago. The Small Business Administration (SBA) adjusted their business partner buyout financing rule in April 2018, and now offers a loan product with partner buyouts in mind — ultimately benefiting all parties involved in the transaction. To understand why the SBA’s business partner buyout loan can be advantageous, we need to step back for a moment.
WHY AN
SBA LOAN
SMALL BUSINESS ADMINISTRATION 7(A) LOANS Let’s start with a quick overview of what the SBA is. The Small Business Administration is a government agency that serves as the main resource for government-backed business loans. A portion of SBA loans is guaranteed by the government and these loans allow small business owners to obtain capital with less equity than a conventional loan requires. To clarify, the federal government does not lend you the money, the bank does. The SBA just guarantees a percentage in the event of a default on the loan. The SBA 7(a) loan is the most common SBA loan product, offering flexibility on terms and business uses. These loans can be used to set up a new business, assist in an acquisition or expansion of an established business or buyout a partner. There are many benefits of SBA loans, and the specific terms can be negotiated between the borrower and an SBA-approved lender. When considering an SBA loan, it’s ideal to work with an SBA Preferred Lender (PLP). PLP status with the SBA gives lenders authority to make final credit decisions without having to get SBA approval and is typically a sign that the lender has more experience with SBA loans, resulting in a smoother, faster process.
IS A
SMART CHOICE
FOR YOUR D I S T I L L E RY
PARTNER BUYOUT
ES EX PL OR IN G EX IT ST RATE GI PPA RD WRI TTE N BY TRA CY SHE
SBA LOANS FOR PARTNER BUYOUT Before the rule change in 2018, financing a partner buyout with an SBA 7(a) loan was difficult. The old SBA rule said that to qualify for a loan to buy out a partner's interest in the business, the balance sheet had to have a minimum of 10 percent equity based on the business’ W W W . ARTISANSPIRITMAG . C O M
total assets after the sale. Also, partner buyouts had been accomplished through a stock purchase, which would be applied to the balance sheet often resulting in negative equity. This made securing SBA loans improbable without the buyer investing personal funds to meet the 81