Though partner buyouts often have earnout contingencies, in this case, the retiring partner was planning on leaving the country and needed the buyout funds to purchase his retirement home.  The junior partner did not want to pass up the opportunity to own the entire firm, turning to a bank term loan to fund the partnership buyout.  He considered an SBA loan, but the additional fees, documentation requirements, and long loan terms made the loans less desirable than a bank term loan.

The junior partner had a solid credit score in the mid-700s, and the partnership had enough cash flow to cover the payment on a bank term loan.  The partner was able to secure a 2-year loan at for $350,000.  The interest rate was fixed for the term of the loan, and the loan did not have any prepayment penalty.  The firm’s decades of existence were well beyond the two-year requirement for the loan.

Though the partner intended to pay off the loan early, the 2-year term gave him the flexibility to make extra payments or to preserve the cash needed for his operations.  Because accounting firms have seasonal variations in cash flow, he chose to make the minimum payments during the slower period of the year while making large payments during the busier seasons when revenue was higher.

 

The partner paid off the entire loan in 18 months which saved him significant amounts of interest.  Once the loan was paid off, he owned the entire firm outright and was able to focus on running and expanding the business.

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