Partner buyout loans, and 5 alternatives

Partner buyout loans can be tricky depending on the type of collateral you have to offer the lender.  However, there are alternative ways to buyout your existing partner.  You will have the opportunity to start fresh and get rid of your existing partner, especially if there is unnecessary drama that can be avoided.  This will give your business more freedom since you will no longer have to split profits, and you will have control over business decisions.  Below are some alternatives to partner buyout loans.

Adjusting Partnership

What do you do if the valuation of your business comes in low and you are unable to find the right financing from a lender?  You might want to consider changing the ownership percentages in your favor on the partnership agreement.  This allows you to have primary control of the company’s finances and liabilities and allows you to make important business decisions without going out and spending precious capital on financing a buyout.  Remember, always consult with a reputable acquisitions attorney before making changes to your partnership agreement.

Home Equity

Pulling precious equity out of your home to fund a buyout may be a good alternative. Although not the smartest thing to do, it may be a viable option especially if you have a sense of urgency for the deal to be done.  There are advantages to using your home equity line for a buyout.  First, the payments are interest only.  You can delay making large payments on the equity line until after the buyout is complete.  Second, the interest that is used may be tax deductible.  Please consult with a certified public accountant before proceeding.

Retirement

Do you have a 401k, IRA, SEP IRA, or investments?  Using funds from one of these accounts can be a good option instead of a partner buyout loan.  Keep in mind that there are tax consequences as well as early withdrawal penalties associated with these transactions.  Early withdrawal penalties will depend on balances in your retirement account and your relationship with your financial institution.  For 401k withdrawals, if you are 59 1/2 and under, you may be subject to a 10% federal tax penalty.  However, if you are in a bind and do not have any other way to fund your buyout, this may be a good way to complete the deal.  Please consult with a tax professional and your financial adviser before going this route.

Merchant Services Cash Advance

A merchant services cash advance is a loan from your daily credit card transactions.  Merchant services cash advances typically have a very high interest rate.  They take anywhere between 8-30% of your daily receipts.  Lenders let the business borrow a percentage of its credit card transactions depending on the volume of the business’ transactions.  Rates will vary widely based on the business and risk that the merchant cash advance company is taking.  They will typically allow 10-40%.  Payment is deducted from the credit card sales.  This may not be the best alternative due to the high costs associated with advances.  But it is an option if you are in a bind and want your partner out the door as soon as possible.

Business Lines of Credit

Lines of credit are typically used for short term working capital, purchasing inventory, or payroll.  However, you can use it to buyout your existing partner.  That is assuming there are sufficient funds available and your partner agrees on the amount.  Many businesses enjoy having a line of credit in place as a backup.  A line of credit allows a business to continue to operate while waiting for invoices or accounts receivables.

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