Welcome to South Florida Funding Group – Your Business Funding Source
Buy out written in wooden letters on blue background business concept

Bad Credit Fast Cash to Buy Out a Business Partner

There may come a time during your ownership of a business where you may want to look into how to buy out a business partner. This process can be made even more complicated if you need fast cash or have bad credit. However, the good news is that you do have options for financing a partner buyout such as by choosing an alternative business loan. The goal of this article is to help you better understand everything that you need to know about partner buyout loans and what your options are.

Understanding Partner Buyout Loans and Buyout Options

Partner buyout loans, which also is referred to as partner buyout financing, is a type of funding that a partner uses to purchase the ownership stakes from the other partner(s). You have a few different options as to how to finance the buyout, but the buyout process needs to occur in order to become the full owner of the business. Partner buyouts can be very expensive, which is why many people opt to get financing to cover these costs rather than raise the money themselves.

Before a buyout can take place, the partners need to agree about how much the business is actually worth and how much the partner that is being bought out will get for their portion. Ideally, this should be something that is addressed in the partnership agreement, but in many cases, people don’t include this in the original agreement. If you can’t agree on the value, find a middle ground between the partners, or bring in a 3rd party for an independent valuation.

There are 4 major types of partner buyouts, which may be combined or used individually depending on the needs of the business. These include:

  • Lump Sum

A lump sum buyout is typically the fastest approach to partnership buyouts since it offers the partner a one-time payment for their departure based on their equity with the company. This can also be very difficult to do because you often require a loan to do this.

  • Earn-Outs

This option means that the partner will receive their buyout in payments over a specific period of time, but they are required to stay with the company during a transition period. For the most part, these are offered based on the performance of the company meaning that the better the company does during this period, the more money the partner leaves with.

  • Buyouts Over a Period of Time

These are similar to earn-outs, only the partner can just leave without having to earn the buyout.

  • Equity Buyout

With an equity buyout, a new partner and/or shareholders will purchase the ownership stake from the partner.

Different Options for Partner Buyout Loans

You have two primary options for partner buyout loans: a traditional business loan or by going through alternative financing. With a traditional business loan, you can get the bank to lend you the money that you need for a partner buyout. The problem is that these can be pretty difficult to get because companies typically take a significant financial hit when a buyout happens, which makes lending money to riskier for the lender.

There are still traditional options available to you, such as going through an SBA loan. The SBA 7(a) loan does make it easier to obtain funds for a partnership buyout, where you could potentially receive 100% funding rather than the previous terms of you paying 10% of the buyout cost and the rest would be covered by loans. Going through a traditional lender will require you to show the business will continue to be strong even after the buyout, which means that you’ll need to revisit your financials and business plan, as well as hiring a transition expert to help minimize any risk to the lender.

The other option is to go with alternative funding. Alternative funding can be a great option, particularly if you have bad credit. With alternative funding lenders, there are options where you can get equity financing which is specifically made for these situations. Alternative funding does have many different options available that can help you fund a partner buyout and you can often get these loans even with bad credit.

Now, let’s look at some of the different options available to you which involves going to a lender:

SBA 7(a)

The SBA (Small Business Administration) does back some loans that can help business owners buy out their partners. Specifically, the SBA 7(a) loan can be used for this purpose. This loan was designed to not only start a business but to also help expand the business, such as to buy out a partner. In order to get this type of loan, you do need to have more information than just your financials. You need to also have a post-exit strategy in place and tell the SBA how you plan on effectively operating the business on your own. The biggest downside with this option is that it can take a lot of time, sometimes several months, to get funding. This means that an SBA 7(a) isn’t the ideal option if you need the money fast to buy out your partner.

Equity Financing

Another option is equity financing. With this option, you are basically just selling your partner’s stake in the company to investors or another partner. You will be able to get rid of your current partner, but you still won’t retain full ownership of your company. If you’re not trying to get full ownership, then this is a good option to consider.

Traditional Bank Loan

When going through a more traditional lending route, the first place that you should go to is the SBA for a loan. However, if you can’t get funding through the Small Business Administration then you need to find some other traditional lender to turn to. Going to a bank or credit union may provide you with the funding that you are looking for. The problem here is that in many cases the traditional lender may be hesitant to fund a partner buyout. Losing the stability of having a partner makes lending to you risky, especially since the partner leaving doesn’t guarantee that you will continue to turn a profit.

Alternative Lenders

One of the best options that you could choose if you have bad credit and/or need a fast cash solution is by turning to alternative lenders for funding. Alternative lending options are made for small businesses to get the funding solutions that they need, no matter what their credit score is. Alternative lenders typically have competitive terms with traditional bank lenders, which is one reason why this option is so popular. This is also a popular option because the approval process is faster, and you get your money sooner with alternative financing. The biggest downside with this option is that if you have bad credit, you will have higher interest rates.

Self-Fund Partner Buyout

You do also have the option of self-funding the partner buyout if you have the funds. You can do this through a lump sum payment or pay the amount of money over a specific period of time.

Should You Get a Loan for a Partner Buyout?

You may be wondering if you should go with a loan or find a way to buy out your partner without one. This section will take a close look at the pros and cons of getting a loan for a partner buyout so that you can make an informed decision.

Pros

  • Reduces Any Impact on Your Cash Flow

You do have the option of using your own cash flow for the partner buyout, but this can be expensive for any small business owner to do. This can impact your cash flow because you are spending money on something that isn’t actually offering any value to your business. A buyout loan means that you can free up money to continue to operate and grow your business rather than spend it on a partner buyout.

  • Quickly Helps You Get Rid of Your Partner

If you and your partner are on good terms, you may be able to take a slower approach to the partner buyout process. But if your business relationship with your partner is toxic, then you want a fast solution to get rid of them. A toxic relationship between business partners can negatively affect your business, which is why a fast solution like getting a partner buyout loan can be the best option.

  • Allows You to Focus on Your Business

Sometimes a partner will choose to just dissolve the partnership rather than buyout the partner. The problem is that this means that you’ll be left starting a new business from scratch, which can be challenging to do.

Cons

  • Can be Difficult to Qualify for a Partner Buyout Loan

The biggest downside is that it can be very difficult to qualify for a loan to buy out a partner. This is because traditional banks want to put their money where value can grow, not risk losing money.

  • Negatively Impacts a Business

A reason why lenders don’t like to give money for partner buyouts is that there is a risk that losing a partner can negatively impact a business. If the partner was a valuable asset in launching and succeeding, so losing that can hurt your business.

  • Other Loan and Legal Expenses

Many times, people don’t calculate the other expenses related to the buyout. These expenses can add up, making your loan even more expensive.

What to Know About the Partner Buyout Process

When you are buying out your partner, you should consider hiring a lawyer for this process. You may be tempted to save money by not hiring a lawyer if you’re on good terms with your partner, but it’s always best to protect yourself and your business. You want to make sure that you are in complete compliance with the law and since every state has its own laws to consider, a lawyer can be a major asset to you throughout this process. The lawyer will work with you to create buyout agreements and make sure that all of the necessary documents are filed by the deadlines. If your partner and you are not on good terms, the lawyer can be essential in negotiations and help you navigate a more hostile buyout process.

Conclusion

As you can see, there are a lot of things to consider when you are thinking about buying out your partner. Whatever the reason is for buying out your partner, you do have options available to you that you can consider. Which option is best for you can depend on a variety of different factors, so it’s important that you closely look at your specific situation to determine the best course of action. This is important for making an informed decision as to what your next steps should be.

south-florida-funding-group-logo.jpg

The business funding you need when others say No!.

2569 Bay Pointe Dr.
Weston FL 33327

Email:
drew@southfloridafundinggroup.com 

786-544-2700

DISCLAIMER

 The operator of this website is NOT a lender, does not make offers for loans, and does not broker online loans to lenders or lender partners. Customers who arrive at www.SouthFloridaFundingGroup.com are matched with a lender or a lender partner, who offer business loan products or credit repair services.