A quick note:

Make sure to check out my business SMB Business Plans if you're in need of a business plan for your SMB acquisition. We know how to write these business plans in the exact style that SBA lenders are looking for.

Also, check out Pioneer Tribe Insurance if you need insurance around your business acquisition.

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Partial Buyouts

Last week, I wrote about partial buyouts and why business buyers might consider them. Here's last week's newsletter, in case you missed it.

This week, I wanted to give a different example of a partial buyout.

Let's take a look at Bob, a savvy business buyer who has his eye on Jane’s Engineering Firm, a $1 million EBITDA business.

But Bob's not buying the entire business.

He's buying 90% of it.

Why a Partial Buyout?

Picture this: Bob scrolling through listings, sipping his favorite overpriced latte, when Jane’s Engineering Firm catches his eye.

He loves the numbers: $1 million in earnings, a solid customer base.

But Jane’s industry has a catch: Licensing.

Without her, the business could come to a grinding halt.

Here’s why a partial buyout made sense:

Licenses are required to operate in Jane’s industry (think HVAC, engineering, or healthcare). And those licenses are tied to specific individuals.

Transferring them? A paperwork nightmare.

By retaining a 10% stake, Jane kept her name on the license while Bob learned the ropes. (See SBA SOP, Page 91, Section A, Chapter 2).

Jane’s Brain = Business Gold

Bob knew Jane’s 20+ years of expertise were priceless. By keeping her as a minority owner, he had her on speed dial for advice, introductions, and troubleshooting. And with an ownership stake, Jane is still incentivized to help Bob. You probably know that consulting agreements aren't always followed through on by sellers with no skin in the game.

SBA Financing: Simplified

Did you know the SBA excludes the seller’s retained equity from both the sources and uses of funds? This made financing easier and kept Bob’s focus on acquiring his 90%. (Page 157, Chapter 3, Section A).

Let's say Bob and Jane agreed on a $4 million valuation for the business.

Breaking Down the Adjusted EBITDA

Bob needed to ensure the numbers worked for financing purposes, so he spent time analyzing Jane’s Adjusted EBITDA.

Adjusted EBITDA is the business’s earnings before interest, taxes, depreciation, and amortization, adjusted for non-recurring or owner-related expenses.

The Debt Service Drama Bob knew that to get the SBA loan approved, his Debt Service Coverage Ratio (DSCR) had to be at least 1.50. If DSCR sounds like a scary financial term, it’s not—just think of it as the buffer between earnings and debt payments.

Here’s how Bob made the numbers work:

What About Jane? Retaining Jane as a minority owner meant ensuring her compensation, involvement, and equity were all properly accounted for:

1. Post-Acquisition Salary: Bob negotiated a consulting fee for Jane, paying her $100,000 annually. This was enough to keep her engaged without straining the business’s cash flow. (See SBA SOP, Page 193, Chapter 5, Section B).
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2. Defining Jane’s Role: The operating agreement clearly defined Jane’s role as a consultant and minority owner. She had input on strategic decisions but no day-to-day operational authority. (See SBA SOP, Page 92, Chapter 2B).
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3. Future Buyout Costs: Bob knew buying out Jane’s remaining 10% equity later could be expensive, especially if the business grew. To avoid surprises, he negotiated fixed buyout terms at the time of the initial deal.

Lessons Learned from Bob’s Buyout Adventure

1. Crystal-Clear Operating Agreements Retaining the seller as a minority owner requires airtight agreements. This isn’t the time to DIY with a template you found online. Get a lawyer. (See SBA SOP, Page 92).
2. Balance Seller Involvement with Ownership The more value Jane provided post-closing, the more justified her 10% stake felt. But if Bob was doing all the heavy lifting, he’d want to maximize his ownership sooner.
3. Know the SBA Rules Did you know that if Jane had kept 20% or more of the business, she’d have to personally guarantee the loan? Bob avoided this complication by capping her ownership at 10%. (Page 206, Section A, Chapter 5).

Could a Partial Buyout Work for You?

Whether you’re looking at an HVAC business, medical practice, or even a dog grooming company, partial buyouts offer flexibility and reduced risk. Plus, they’re an incredible way to tap into seller expertise while easing the financial burden of a full buyout.

Let’s Make It Happen If you’re curious about structuring a deal like Bob’s, let’s chat! At Pioneer Capital Advisory, we specialize in SBA financing for first-time buyers. From modeling cash flow to navigating the SBA’s red tape (because yes, there’s always red tape), we’ll guide you every step of the way.

📩 Email me at matthias@pioneercap.com 🌐 Visit us at pioneercapitaladvisory.com​

Take care,

Matthias

Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

Thanks for reading! Feel free to reply directly to this email with any questions or thoughts.