How To Buy Into a Business as a Partner

Buying into an existing business as a partner can be an incredible opportunity for both the new partner and the existing business. In addition to capital, the new partner may bring knowledge and expertise currently lacking in the company. In many situations, both sides see a good return when the pairing is right.  

How do you become a business partner?

To become a business partner, you must purchase company equity. The aim is not to buy a business outright, only a portion or percentage of it. To do this, you’ll either need to use cash, take out a business loan, or do a combination of the two. 

Once you’re a partner, any future profits will be shared with you as a new part-owner. How much you receive will depend on your ownership percentage.

Why do businesses look for new partners?

Businesses open to new partners sometimes prefer selling equity rather than taking on additional debt, because the money they receive from the new partner doesn’t have to be paid back. However, the partner will receive a return on their investment via a percentage of any profits.

Sometimes companies are not able to qualify for the loan they need, or maybe the current owners are looking for someone who has a particular skill set that might help their business grow. Another option is that one of the partners is looking for an exit. Before you buy out a partner. make sure you fully understand why he or she wants to be bought out.

What is a partnership agreement?

A partnership agreement is needed when a new partner buys equity in the business. It outlines how profits and losses will be shared, what responsibilities and duties each owner assumes, and the overall terms between all parties. It’s similar to a buy-sell agreement, but a buy-sell agreement only establishes when one owner can buy out another.  

When becoming a partner, it’s important to fully understand both the partnership agreement and the buy-sell agreement. 

Can you use a loan to become a business partner?

Yes, you can use a loan to purchase company equity and become a business partner. You’ll likely need to secure the loan with a personal asset, such as real estate, stocks and bonds, or company assets from a business you already own. Depending on the loan amount and the value of your assets, you may have to collateralize multiple assets to secure the loan.

What types of loans can be used to purchase company equity?

There are many ways to purchase company equity. Common options include:

• Traditional bank loan – If you have a strong credit score, a traditional bank loan can be used to purchase a partnership. Unlike the SBA loan, you don’t have to currently be a small business owner. 
• Seller financing – Seller financing is when the seller offers the capital needed to buy them out of their business. Instead of loaning money in the traditional manner, the seller is paid through monthly payments. Loan terms vary, and are whatever both parties agree to. 

Final thoughts

When purchasing equity to become a business partner, it’s important to understand why the company is looking for a new partner and what their current financials are. Complete understanding of the partnership agreement is also necessary. If everything looks good, a business acquisition loan may bring in a great return on your investment.
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_{Information provided on this blog is for educational purposes only, and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strives to keep its content up-to-date, it is only accurate as of the date posted. Offers or trends may expire, or may no longer be relevant.}