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SBA Partial Buyout: A New Way For Business Owners To Retire

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When is the right age for a business owner to retire? For years, people would hit the magic number of 65, and be told it’s time to hang it up.  Now countless parts of society are rapidly changing around us: people are living longer, the rate of age is slowing, and the cost of living is increasing.  All leading to what can feel like a number of years with not much to do but read the paper and walk the dog.

Most people will work for 45 years before retiring.  While one could see that as the perfect reason for a nap, others question what removing that structure of work will do.  Remember that work isn’t a four letter word.  It keeps the mind sharp, puts order into your day, and gives people added purpose. 

All of this is particularly true for business owners.  Owning your own business is part of your identity, it can become who you are and what you’ve poured yourself into.  So the idea of selling it off and never looking back can be daunting for business owners.  So daunting that many business owners don’t have a succession plan.  Who do you sell to? How do you find a buyer? Who will take care of this business the way that I would want?

What if there was another solution? A way to stay involved yet remove your investment and financial risk.  A way to find a buyer you can trust who already knows your business.  A new way of thinking about retiremen…maybe we call it the “work-less” time in your life.

SBA Partial Buyout

A Small Business Administration (SBA) partial buyout allows owners to sell a portion of their business to an employee while maintaining partial ownership and involvement. The involvement level can vary, but typically, the owner scales back their day-to-day responsibilities while still benefiting from the business’s income.

This solution merges the benefits of liquidity and legacy preservation: sell a portion of your business, secure a steady retirement income, and pass over the operations to a trusted employee who already understands the business. An opportunity for retiring business owners to gain financial security while maintaining a connection to their business. And an opportunity for employees: a partial buyout with favorable terms makes owning the business a reality. 

Safeguard your financial future.  Ensure the longevity of your business.  Enter into your new “work-less” era. Read on about how it works.  

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What is an SBA Partial Buyout?

An SBA partial buyout can be seen as a hybrid retirement strategy. It not only ensures the business continues under new management but also provides a retirement income to the outgoing owner. This method of succession planning is particularly popular among small to medium-sized business owners who have a vested interest in the future of their companies but are ready to reduce their workload.

This strategy aligns with the broader category of “Small Business Retirement Plans,” offering a unique blend of flexibility and security for retiring business owners who are not yet ready to completely detach from their entrepreneurial roots. By opting for a partial buyout, they can phase into retirement at their own pace, ensuring a smoother transition and continuity of their business.

The SBA supports these transactions through its various loan programs, which provides the necessary financing to the buyer. The advantage of using an SBA-backed loan lies in its favorable terms, such as lower down payments and longer repayment terms compared to conventional loans. This makes the SBA partial buyout an appealing and accessible option for both sellers and buyers.

The 81/19 Partial Ownership Strategy

The 81/19 partial ownership model involves a retiring business owner selling 81% of their business to a buyer and retaining a 19% stake. This allows the retiring owner to step back from daily operations and reduce their workload, while still benefiting from the business’s profits as a passive income stream.

Benefits of Retaining a 19% Share:

  • Continued Income: The owner continues to receive a share of the business’s profits, which can help support them financially in retirement.
  • Reduced Operational Responsibilities: The owner can significantly reduce their day-to-day involvement without completely detaching from the business.
  • Legacy Preservation: By maintaining a stake, the owner can ensure the business remains true to its founding principles.

The SBA offers several loan programs that can facilitate the 81/19 strategy, notably the 7(a) and 504 loan programs. These loans can be used by the new majority owner to finance the purchase, offering benefits such as lower down payments and extended repayment terms, which make the transaction more feasible.

Benefits of SBA Partial Buyouts for Retirement

Financial Security and Continual Income

One of the primary advantages of an SBA partial buyout is the opportunity it creates for a steady income stream post-retirement. By selling only a part of the business, the retiring owner can continue to receive a portion of the business’s profits. This setup is especially beneficial for those who may not have sufficient personal savings or pension to support their lifestyle in retirement. The income derived from the retained share of the business can significantly supplement other retirement funds, providing a comfortable cushion.

Risk Mitigation

Engaging in a partial buyout reduces financial risk for the retiring owner. Since the business is not sold entirely, the owner can continue to influence its direction and stability, helping to safeguard the investment. This partial involvement helps mitigate the risk of business failure post-transition, as the original owner can still guide and mentor the new management based on their extensive experience and knowledge of the industry.

Ensuring Business Continuity

An SBA partial buyout is particularly effective in ensuring the continuity of the business. Transitioning management and ownership gradually can maintain business operations smoothly, which is less disruptive to employees and customers than a complete change in ownership might be. This gradual transition can also foster stronger relationships between the outgoing owner and the new management, which is crucial for maintaining the business’s operational ethos and client relationships.

Business Succession Planning

For many business owners, finding a successor within the family or among current employees can be a preferable and rewarding option. An SBA partial buyout facilitates this type of succession planning, allowing the owner to hand over the reins gradually to someone who understands the business and shares a vested interest in its success. This method strengthens the business’s future prospects, ensuring that the new owners are well-prepared and committed to the business’s growth and sustainability.

An SBA partial buyout not only addresses the immediate financial needs of retiring business owners but also ensures the long-term stability and success of the enterprise they built. This strategy provides a balanced approach to retirement, combining income security with the fulfillment of leaving a lasting legacy.

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How to Qualify for an SBA Partial Buyout

Qualifying for an SBA partial buyout involves understanding and navigating the specific criteria set by the Small Business Administration. This process ensures that both the retiring business owner and the potential buyer are eligible for the program, which can support the financial transaction through favorable loan conditions.

Understanding Eligibility Criteria
The first step in qualifying for an SBA partial buyout is to ensure that both the business and the prospective buyer meet the SBA’s eligibility requirements. Typically, the business must operate for profit within the United States, have reasonable owner equity to invest, and use alternative financial resources, including personal assets, before seeking financial assistance. The buyer must also demonstrate industry experience, a good credit history, and a solid business plan that outlines the future success of the business under their management.

Prerequisites for a Partial Buyout
Beyond general eligibility, specific prerequisites must be met for a partial buyout scenario:

  • Business Valuation:A fair market valuation of the business is crucial, often requiring professional appraisal services to determine the worth of the business being partially sold.
  • Owner Agreement:Both parties must agree on the terms of the buyout, including the ownership percentage to be sold and the roles the current owner will continue to play.

Applying for an SBA-Backed Loan
Once eligibility and prerequisites are confirmed, the next step is applying for an SBA-backed loan, which can be used to finance the buyout. The application process includes:

  • Loan Package:Submission of a detailed loan package that includes financial statements, business plans, and projections that support the viability of the buyout.
  • Lender Selection:Choosing an SBA-approved lender who is familiar with SBA loan processes and partial buyouts can facilitate smoother transactions.
  • Due Diligence:Both the buyer and the seller must undergo thorough due diligence by the lender, ensuring that all financial dealings and the business’s operational history are transparent and compliant with all regulatory requirements.

Successfully navigating the qualification and application process for an SBA partial buyout can open the door to a strategic, financially secure retirement for business owners. It ensures that the legacy of their hard work continues while providing them with the financial freedom to enjoy their retirement years.

Challenges and Considerations

Managing Expectations Between Parties
A key challenge in an SBA partial buyout is aligning the expectations of the retiring owner and the new stakeholders. Discrepancies in visions for the business’s future, valuation disagreements, and differing operational philosophies can create friction. Clear, open communication and legally binding agreements are essential in outlining each party’s roles, responsibilities, and expectations to mitigate these issues.

Financial Risks and Liabilities
Financing a partial buyout, even with the help of an SBA-backed loan, introduces financial risks. The new owners must manage debt responsibly to avoid overleveraging, which could jeopardize the business’s financial health. Additionally, the retiring owner must ensure that the buyout sum and the retained equity portion will support their retirement needs. Professional financial planning is crucial to balance these economic factors effectively.

Transition Complexity
The complexity of the transition process can be a significant challenge in an SBA partial buyout. It involves detailed planning, including the transfer of knowledge, client relationships, and internal processes. Mismanagement during this phase can lead to operational disruptions, loss of clients, or employee dissatisfaction. Structured transition plans, possibly phased over several years, can help mitigate these risks by allowing gradual changeovers in leadership and operations.

Effective planning, clear communication, and professional guidance are imperative to navigate these complexities successfully. By addressing these issues proactively, business owners can enhance the prospects of a beneficial transition for themselves, their successors, and their business.

Embracing the SBA Partial Buyout for a Secure Retirement

By providing financial security, facilitating smooth business transitions, and allowing owners to maintain a stake in their companies, an SBA partial buyout can balance immediate retirement needs with long-term business stability. Key benefits include continuous income, risk mitigation, and seamless succession planning.

If you’re considering retirement and want to ensure the longevity of your business while securing your financial future, an SBA partial buyout could be the ideal solution.  Embrace the opportunity to retire confidently, knowing that your business and legacy are in capable hands.

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