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Financing a Partner Buyout

Sep 2023

Ask the Expert: 504 Q&A with BDO Angie Sweatman

Over the past couple of years, I have received many questions regarding the eligibility of financing the buyout of a business partner under the SBA 504 Loan Program. The SBA 504 loan program was designed for small business owners to finance commercial real estate and fixed assets for use in their day-to-day operations. Since the SBA 504 loan provides long-term fixed interest rates that can be amortized over 10, 20, or 25 years, the 504 loan can be the best choice when there is a partner buyout of the real estate and/or equipment.

After successfully financing many of these projects, here is how to determine eligibility along with a sample deal structure.

Determining Eligibility

	Is the acquisition for costs associated with eligible real estate and/or other eligible long-term fixed assets? The acquisition of any other assets such as goodwill or receivables is not an eligible use of 504 loan proceeds and must be financed by other means, such as a 7(a) loan. A 7(a)-companion loan for those assets can be submitted at the same time as the 504 application.
	Will jobs for the business be created or retained because of the change in ownership or will the jobs be lost without the change in ownership or will the acquisition meet a new SBA Public Policy Goal?
	The 504 loan proceeds must not be used to purchase stock or any other owners’ interest in a business unless, by purchasing the stock or other ownership interest, the Applicant is purchasing the real estate where the Applicant is located and/or other eligible long-term fixed assets used in the Applicant’s business operation.
	If the value of the stock or other ownership interest exceeds the value of the real estate and/or other eligible long-term fixed assets (“excess value”), the EXCESS VALUE: Cannot be financed by the 504 Project financing; it must be financed separately; and Must be de minimis compared to the value of the real estate and/or other eligible long-term fixed asset(s).

Is the acquisition going to result in the buying partner(s) purchasing 100% of the business assets? Partial buyouts cannot be financed.	The seller may not remain as an officer, director, stockholder, or key employee of the business.	All other 504 Loan Program Requirements must be met.

Structuring the 504 Loan

THE SCENARIO:

➢ The project below is a Retail Furniture Business that has been in operation for 20 years.

➢ There are two owners of the existing company, one is at 60% and the other is at 40%.

➢ The 60% owner is moving across the country to retire and be closer to family members and has agreed to a buyout of $280,000.

➢ There are no receivables and no goodwill associated with this transaction.

➢ The business plans to hire additional employees over the next two years.

➢ The appraised value of the real estate is $1,500,000.

WHAT IS THE TOTAL EQUITY AVAILABLE?

Appraised Value: $1,500,000

Existing Mortgage Balance: $1,000,000

Total Equity: $500,000

WHAT IS THE PARTNER AGREED UPON BUYOUT AMOUNT?

Buyout Partners Ownership: 40%

Buyout Owners Equity in Property: $200,000

Exiting Partner’s Ownership: 60%

Exiting Partner’s Equity in Property: $300,000

Partner Agreed Upon Buyout Amount: $280,000

USES OF FUNDS

Buy-out Owners Equity in Property: $200,000

Purchase Price: $1,280,000 (Loan Balance + Buy-Out Amount)

Closing Costs/Professional Fees: $20,000

Total Project Cost: $1,500,000

SOURCES OF FUNDS

Lender/First Mortgage: $700,000 (46.7%)

Lender/Interim Loan: $600,000 (40.0%)

Buy-out Owners Equity: $200,000 (13.3%)

Total Project Cost: $1,500,000 (100.0%)

Get In Touch!

Connect with Angie: Email | LinkedIn First Capital Finance/Florida First Capital has 12 Business Development Officers working with small businesses throughout Florida, Georgia, and Alabama. To get in touch with a BDO in your area, visit cjpk.net/talk-to-a-loan-expert.