After spending 25 years working in his accounting firm and growing the business, the senior partner in a small accounting firm located in Ohio was ready to retire. His partner was willing to buy him out, but the practice had been run by the two of them for decades without the need to ever maintain large cash balances in the business account. Additionally, the partner who was going to remain in the firm had two kids in college and had very little cash available to fund the buyout.
Though partner buyouts often have earnout contingencies, in this case, the retiring partner was leaving the country. He needed the buyout funds to purchase his retirement home. The junior partner actively chose strategic full ownership. Choosing a bank term loan over an SBA loan due to higher fees and longer terms, he secured the buyout funds. Consequently, he successfully secured the necessary funds to become the sole owner of the business.
The junior partner had a solid credit score in the mid-700s. Additionally, 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.
Despite the partner’s plan to pay off the loan early, the 2-year term allowed for extra payments or preserving cash for operations. Due to accounting firms’ seasonal variations in cash flow, he strategically chose to make minimum payments during slower periods. As a result, he reserved larger payments for busier seasons when revenue was higher.
The partner paid off the entire loan in 18 months which saved him significant amounts of interest. Paying off the loan granted him full ownership of the firm, allowing a focus on business operations and expansion.
Casey has 12 years of technical writing experience. She is also a CPA and bookkeeper. Casey graduated from the University of St. Thomas (Minnesota) with a B.A. in mathematics and currently resides in San Diego, CA.
