A partner buyout is a major milestone, and timing plays a big role in getting it right. But just as important is how you structure the deal financially. The right funding strategy can protect your cash flow, preserve stability during the transition, and position your shop for growth long after the papers are signed.
Is it better to spend your cash reserves? Or should you use auto repair business loans to finance that buyout?
The answer depends on your situation. Done right, borrowing to buy out your partner can set you up for long-term success without draining your working capital. Let’s break down what you should consider before making the move.
If You’re Ready to Buy Out Your Partner
A partner buyout is often the next stage in growing the business. Although, the motivation is different for each person. You might be looking to:
- Gain full ownership and creative control of the shop
- Streamline decision-making and eliminate disagreements
- Reinvest the previously shared profits
- Purchase your partner’s share as part of a retirement or exit plan
Before taking on debt to move forward independently, make sure you understand your motivations and that your financial strategy can support your new business goals. When your financial predictions align with your ideas for expansion and you can reinvest your profits into additional revenue streams, you’re ready to take sole ownership of the business.
Combining your motivations with a profitable vision creates a strong foundation for changing ownership, allowing you to use financing to continue building your auto body repair shop.
If Your Auto Shop is Financially Strong
Changing ownership and taking on new debt can strain your business if your auto shop isn’t financially strong and you don’t protect your cash flow. Before finalizing the buyout, assess your shop’s financials.
If your shop’s income is unpredictable, your credit score is low, or your debt load is already high, consider installment-based buyouts or parietal equity financing rather than taking on another loan.
However, if you can manage ongoing expenses, such as payroll, inventory, and utilities, and keep your debt payments below 25% of your monthly income, your auto shop is sufficiently strong to finance the buyout. Especially if you secure a loan tailored to your unique revenue patterns, you’ll be able to change ownership while successfully running your business.
If Your Financing Supports Your Growth
Even for financially strong auto repair shops, the wrong loan structure can jeopardize your business. You need financing that supports your growth through the change. That means choosing a loan structured to your business model.
Start by separating your buy-out loan from your working capital needs. Changing ownership is a significant and long-term investment, while covering cash flow gaps is a short-term and low-cost funding need. It may make sense to use financing to address both, but you’ll protect your operating budget and save money in borrowing costs by using different funding products.
For the actual buyout, you want a loan that offers significant funding, medium to long terms, and low interest rates. Short-term loans that come with fast-approval and funding may be a more fitting option for immediate working capital needs Each of these products allows you to fund your business during a buyout without disrupting your daily operations or draining your emergency reserves.
Business Term Loans
Business term loans provide a lump sum of capital to facilitate the purchase of your partner’s stake. Then you spread out the fixed interest and predictable payment costs over a set term. Lenders tailor these products to meet your specific needs, such as auto repair financing or business loans for expansion.
Equipment Financing
If part of your buyout involves purchasing your partner’s share of tools, consider using equipment financing. An equipment loan allows you to acquire the machinery while spreading the cost over regular payments. And with the assets acting as collateral, you can often secure low interest rates.
SBA 7(a) Loans
Loans backed by the Small Business Administration (SBA) offer some of the highest funding amounts, longest terms, and lowest interest rates on the market. It’s a cost-effective way to finance your buyout. However, the underwriting process and repayment terms are more stringent than those of other funding options. Make sure you have the time to qualify and can manage the inflexible payments before using an SBA 7(a) loan.
Revenue-Based Loans
If your sales fluctuate throughout the year, consider revenue-based loans. These funding products offer repayment flexibility by linking qualifications and payments to your shop’s income. Even with higher borrowing costs, it can be a great way to protect your cash flow in uncertain times.
If you need financing to support your cash flow through the transition, revenue-based financing can be a fitting option. You could secure a business line of credit or other short-term business funding to access fast and flexible funds. You reinvest in your auto shop and quickly pay back the financing.
If the Benefits Outweigh the Costs
Buying out a partner gives you 100% control over the direction of your auto repair shop. But that control comes at a cost. The key is ensuring that the long-term benefits of full ownership, like higher profit retention, streamlined management, and brand growth, outweigh the costs.
The buyout price can be significant, depending on your partner’s ownership percentage, often ranging from $50,000 to $500,000 or more. If your counterpart has a hands-on role in the shop, you may also need more working capital to hire and train additional staff to maintain operations.
Include the long-term impact on your business in the costs as well. You’ll take on additional expenses, risks, and liabilities along with the opportunities to grow and additional tax benefits. Before you own the entire business, have a plan to make the auto shop profitable.
Before applying for financing, work with lawyers and financial advisors to create an explicit, written buyout agreement and transition plan. These documents will help you negotiate fair terms with your partner and clarify the expenses you’re facing. Then you can continue financing your buyout, knowing it’s a worthwhile investment.
Yes, Finance Your Ownership
If you’re ready to buy out your partner, your auto shop is financially strong, your financing supports your growth, and the benefits of ownership outweigh the costs, using an auto repair business loan is a smart move. With the help of a small business lender who specializes in auto shop financing, you can secure funding and take control of your business on your terms.
