Financing a Partner Buyout With an SBA 7(a) Loan

Your partner wants out. Maybe they're retiring, maybe they've lost interest, maybe the two of you simply want different things from a business you built together. Whatever the reason, you want to keep running it — and you'd rather not spend the next five years paying them out of your own pocket while they sit on the sidelines holding half the company.

This is one of the most common deals we see, and it's one of the best uses of the SBA 7(a) program. A partner buyout financed properly gets the departing owner paid at closing, gets your name on 100% of the business, and spreads the cost over years instead of quarters. As always, FTI Capital is a broker and advisor — we don't lend the money. We structure the buyout, tell you what a lender will actually accept, and take it to the SBA lenders most likely to fund it.

The 30-second version

Why a partner buyout isn't just a smaller acquisition

On paper it looks like any other change-of-ownership deal. In underwriting it behaves differently, in ways that work both for and against you:

• You already know the business — which removes the single biggest risk factor in a standard acquisition. No industry-experience problem, no learning curve, no question about whether you can run it. Lenders weigh this heavily in your favor.
• The financials are your own track record. You're not squinting at a stranger's tax returns. But it cuts both ways: any mess in the books is now *your* mess to explain.
• The borrower is usually the business, not you personally. In most partner buyouts the company borrows and redeems the departing owner's interest, rather than you borrowing personally to buy their shares. That distinction affects the structure, the collateral, and the tax treatment — talk to your CPA early, because it's genuinely consequential.
• There may be no equity injection required. SBA rules provide for reduced or waived injection on certain partial changes of ownership where the business's post-close leverage is conservative enough. This is the most underused fact in partner-buyout financing.
• The relationship is a variable. A friendly retirement and a bitter falling-out are the same transaction on paper and very different deals in practice. Lenders can tell the difference, and so can a valuation dispute.

What SBA lenders actually underwrite

Five things, roughly in order of how often they decide the outcome:

1. Cash flow after the new debt. The business has to cover the buyout loan payment out of its own earnings, with margin to spare. This is the whole ballgame. If the two of you have been pulling most of the profit out as distributions, that money now has to service debt instead — run that math before you negotiate a price.
2. Whether the departing partner's work is covered. If your co-owner ran sales and you ran operations, a lender will ask who's selling next year. A buyout that quietly removes half the company's productive capacity is a weaker deal than the financials suggest. Have a real answer: an existing employee stepping up, a hire already budgeted, or the honest case that the role was never the driver.
3. The valuation. Expect an independent third-party business valuation where goodwill is meaningful — and note that the lender orders it, not you. Family and partnership deals get looked at closely precisely because the parties know each other.
4. Your ownership history and role. SBA rules commonly require that the buying owner has been part of the business for a minimum period before a partial change of ownership qualifies. If you and your partner set the company up together years ago, this is a non-issue. If your ownership is recent, ask about it up front — it can change which program fits.
5. Your personal credit and financial condition. You'll guarantee the loan. Reasonable credit, no unresolved federal debt delinquencies, and a personal financial statement that holds up.

The equity injection question

This is where partner buyouts diverge most sharply from third-party acquisitions, and where buyers most often assume they can't do the deal when they can.

On a standard business acquisition, plan on a minimum equity injection (see our post on SBA down payments). On a partial change of ownership — one existing owner buying out another — SBA rules allow that injection to be reduced or waived entirely when the business's pro-forma balance sheet meets a conservative leverage test after the buyout. Plainly: if the company isn't carrying much debt relative to its net worth once the deal closes, the equity you've already built in the business can do the work that cash would otherwise do.

When that test isn't met, the familiar tools come back into play:

• Your own cash, documented and seasoned in the usual way.
• A seller note from the departing partner on full standby — no payments for a defined period. Often the cleanest fix, and departing partners are frequently more flexible here than expected, especially where they want the business to succeed.
• Retained earnings and the equity already in the company, which is what the leverage test is really measuring.
• A smaller loan. Sometimes the answer is a lower price, a holdback, or an earnout rather than more cash at closing.

Structuring the buyout

What the loan can cover

• The purchase of the departing owner's interest — the core of the deal.
• Working capital, rolled in so the business isn't cash-starved the day after closing. Ask for this; it's easier to include now than to borrow later.
• Closing costs and fees, including the standard SBA guaranty fee.
• Refinancing existing business debt in the same transaction, where it improves the company's position — sometimes the buyout is the right moment to clean up an old high-cost loan or a balloon.

Terms to expect

• Loan size: up to $5 million under the standard 7(a) program.
• Rate: typically the Prime rate plus a lender spread, adjusting over time.
• Term: commonly up to 10 years for a goodwill-driven buyout, and longer where real estate secures the loan.
• Timeline: roughly 45–75 days from a complete application to funding, depending on the lender and how fast the valuation comes back.

The exit details that trip deals up

These are the items that surface late, after everyone assumed the deal was done:

• The departing partner has to actually depart. SBA change-of-ownership rules limit how long a selling owner can stay on as an officer, director, employee, or consultant — generally a short transition period, not an open-ended arrangement. If your plan was for them to keep working there indefinitely, that plan needs revisiting early.
• Their personal guaranty gets released on the existing debt. Good for them, and a point worth raising if the price negotiation stalls — it's real value they're receiving.
• Your buy-sell agreement may already dictate the price or the method. Read it before you negotiate. Some agreements set a formula that a lender's valuation will contradict, and reconciling the two takes time.
• Life insurance on you is commonly required once you're the sole owner, since the lender's collateral is now a business with one key person in it.
• Corporate housekeeping. Updated operating agreement, resolutions authorizing the redemption, clean cap table, current entity standing. Boring, and it delays closings constantly.
• Spousal and co-guarantor consents, depending on your state and how ownership is titled.

Where partner buyouts go wrong

1. Agreeing on a price before anyone tests it against cash flow. A number that feels fair between partners can be a number the business can't service. Establish what the company can support *first*, then negotiate inside that.
2. Ignoring the valuation gap. If the third-party valuation lands under the agreed price, the difference generally becomes your problem — cash, a seller note, or a renegotiation. Anticipate it.
3. Distributions dressed up as profit. Owner compensation, personal expenses run through the business, and years of tax-minimizing addbacks all have to be normalized. Sloppy books cost you loan proceeds because the lender underwrites what it can verify.
4. Letting a personal conflict run the transaction. Deals between estranged partners fail on stalled information, not on credit. If your co-owner is slow to provide documents, that's a schedule risk you should surface immediately.
5. Only asking your own bank. The bank that holds your operating account has one credit box, and partner buyouts sit in an area where lender appetite varies a lot. A no from one lender is genuinely not a no from the market.

What to have ready before you apply

• Three years of business tax returns and financial statements, plus current interim statements.
• A current balance sheet — this one matters more than usual, since it drives the equity-injection question.
• Your operating agreement and any buy-sell agreement, plus the current cap table.
• The proposed terms — price, structure, any seller-note terms, and the intended closing date.
• A short written plan for covering whatever the departing partner did day to day.
• Your personal financial statement, tax returns, and credit picture.
• A debt schedule for all existing business obligations.

How this works with FTI

1. Consult. A free call to look at the business, the proposed price, and your balance sheet — including a straight read on whether an equity injection is even required in your case.
2. Structure & package. We shape the deal, including any standby seller note and working capital, and build a lender-ready package that addresses the partner-buyout questions before underwriting asks them.
3. Match & close. We take it to the SBA lenders in our network whose appetite fits a partial change of ownership, then manage valuation, underwriting, and closing through to funding. We've arranged $41.3M+ in SBA 7(a) financing, and change-of-ownership deals are the core of that work.