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 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.
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.
