When to use this template — and when not to
This template is for the very specific case where the buyer has been a documented active partner in the target Company for at least 24 months immediately preceding the LOI date, and is buying out one or more of the other equity holders. SBA SOP 50 10 permits a 7(a) loan for this transaction without the otherwise-required 10% equity injection.
This template will not work — and the SBA loan will not close — if any of the following are true:
- The buyer has been a passive equity holder, not an active operator (no W-2, no documented role on K-1s)
- The 24-month active-partner clock starts later than the LOI date
- The buyer plans to exit the business after the buyout
- The partnership was created or modified in the last 24 months specifically to qualify for this exception
Lenders evaluate this ruthlessly. We've seen multiple deals get bounced at the centralized SBA underwriting layer for partnerships that looked engineered after the fact. If you're not sure whether you qualify, use the asset-purchase or stock-purchase LOI and run a normal 7(a) with the standard equity injection.
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LETTER OF INTENT
Partner Buyout — [COMPANY NAME]
Date: [DATE]
Buyer (Continuing Partner): [BUYER NAME],
individually, an active partner in the Company since [START DATE — MUST BE AT LEAST 24 MONTHS BEFORE THE LOI DATE]
Seller(s) (Departing Partners): [NAME(S)],
holding in aggregate [%] of the Company's equity
Company: [COMPANY LEGAL ENTITY NAME], a [STATE] [ENTITY TYPE]
This Letter of Intent ("LOI") sets forth the principal terms of a partner-buyout transaction (the "Transaction") in which Buyer, an active partner in the Company for the past [NUMBER] years, will acquire all of the equity interests held by the Departing Partners. The Transaction is intended to qualify for SBA's "change-of-ownership by partner buy-out" exception under SBA SOP 50 10, permitting SBA 7(a) financing without a separate equity injection requirement. Except as expressly set forth in Section 10, this LOI is not legally binding.
1. Active partner status
Buyer represents that, as of the date of this LOI: (a) Buyer has been an active equity holder in the Company for at least the twenty-four (24) months immediately preceding this LOI; (b) Buyer has been actively engaged in the operation and management of the Company throughout that period, with such engagement documented on K-1s, W-2s (if applicable), and Company records; (c) Buyer intends to remain actively engaged in the operation of the Company following closing; and (d) Buyer's partnership status was not engineered or recharacterized for the purpose of qualifying for the SBA exception.
2. Purchase price
The aggregate purchase price for the equity interests held by the Departing Partners ("Purchase Price") will be [$0,000,000], representing [%] of the implied total equity value of [$0,000,000]. Purchase Price will be paid at closing:
- Cash at closing: [$0,000,000] (financed by SBA 7(a) loan; no separate equity injection required under the partner-buyout exception)
- Seller financing (if applicable): [$0,000,000] on standby
3. Transaction structure
Departing Partners will sell, and Buyer will purchase, all of their equity interests in the Company. Following closing, Buyer will be the sole equity holder of the Company and will operate the Company in continuity with its current business.
4. Working-capital adjustment
Purchase Price assumes the Company's working capital is delivered at [$000,000] at closing, with dollar-for-dollar adjustment.
5. Due diligence period
Notwithstanding Buyer's existing knowledge of the Company, Buyer's lender will require independent third-party diligence, including a Quality of Earnings analysis. Buyer will have sixty (60) days from LOI signing to complete diligence and obtain SBA loan commitment.
6. Earnest money
Buyer will deposit [$00,000] in escrow within five (5) business days of LOI signing.
7. SBA loan condition
The Transaction is conditioned on Buyer's receipt of an SBA 7(a) loan commitment in the principal amount of at least [$0,000,000], on terms reasonably acceptable to Buyer, including the lender's confirmation that the partner-buyout exception applies and no separate equity injection is required.
8. Definitive agreements
The parties will execute (a) a Stock Purchase Agreement (or Membership Interest Purchase Agreement, as applicable), (b) a Release Agreement under which Departing Partners release the Company and the Continuing Partner from claims arising from their tenure as partners, and (c) such other agreements as the SBA lender requires.
9. Confidentiality
Each party agrees to keep confidential the existence and terms of this LOI. This Section is binding.
10. Binding provisions
Sections 6 (Earnest Money), 9 (Confidentiality), 11 (Expenses), and 13 (Governing Law) are legally binding upon signature. All other provisions are non-binding statements of intent.
11. Expenses
Each party will bear its own legal, accounting, and advisory fees, whether or not the Transaction closes.
12. Public announcements
No public announcement without prior written consent of all parties.
13. Governing law
This LOI is governed by the laws of the State of [STATE].
Accepted and agreed:
BUYER (Continuing Partner):
______________________________ [NAME]
DEPARTING PARTNERS:
______________________________ [Each departing partner signs]
Negotiation notes
- Document the 24 months early. Have your CPA pull K-1s, W-2s, and management-meeting minutes evidencing your active role before you go to LOI. The lender will ask, and assembling this in the diligence period costs weeks.
- Don't engineer the partnership. SBA's centralized underwriting team has pattern recognition for "partnerships of convenience." If your partnership status was created or expanded shortly before LOI to qualify, the loan will likely be denied at the centralized review layer.
- Plan for a release agreement. Departing partners will want a clean release; Continuing Partner will want one too. Don't leave this to the SPA — agree on the framework in the LOI.
- Confirm with your lender first. Before signing this LOI, get a written acknowledgment from your SBA preferred lender that they will underwrite the deal under the partner-buyout exception. Otherwise you risk burning the LOI period and starting over with a standard 7(a).
- Read the rationale. See SBA 7(a) for self-funded acquisitions, section 2 ("The partner-buyout exception is narrower than most searchers think").