The Situation
In the world of business, partnerships can play a huge role in company creation and growth. While most partnerships are formed with the best of intentions and many endure for long periods, success and harmony are never guaranteed for the life of the partnership. Such was the case when a PPS Solutions Fractional CFO was engaged by a company to help firm up the company’s finances and guide it through a caustic and disruptive partnership dispute.
A CFO, fractional or otherwise, is a seasoned executive who can help to lead the company through turbulent times. By providing consistent, constructive support to the partners and showing the potential (financial and other) outcomes of any resolution to the dispute, our CFO was able to help the partners understand how their actions impact the company’s results. Ultimately, the partners decided it was best to terminate their business arrangement, and our CFO was able to successfully negotiate with the parties on the terms of a buyout where one partner would buy out the others and own 100% of the business.
To add to the challenge, the timing of the disagreement was not the best – the business had been severely impacted by Covid shutdowns and its value temporarily diminished by a decline in earnings. Based on all of these facts, the business and its remaining partner did not have sufficient cash to buy out the departing partners directly – therefore financing was needed. Ultimately, the PPS CFO took on the challenge of obtaining an SBA 7(a) loan to finance the buyout.
Understanding the SBA 7(a) Loan Program
The SBA 7(a) loan program is designed to provide financial support to small businesses and entrepreneurs. The program's primary purpose is to support and stimulate the growth of small businesses across various industries. In the context of partnership buyouts, the program provides an accessible and affordable financing option, enabling the remaining partner to acquire the departing partners’ ownership stake.
One of the key advantages of the SBA 7(a) loan program is that it offers favorable terms and conditions, making it an attractive choice for businesses in need of capital for a variety of approved uses. The program provides a government guarantee on a portion of the loan, reducing the risk for approved lenders. As a result, if the business can negotiate the complex and rigid approval requirements, lenders are more willing to extend credit to businesses that may have been considered too risky under conventional financing arrangements.
The SBA 7(a) loan program also offers longer repayment terms than traditional loans, which can significantly alleviate the financial burden on the business undertaking the buyout. The extended repayment period allows for manageable monthly installments, making it easier for the acquiring partner(s) to service the debt without putting undue strain on the company's cash flow.
The Role of the Fractional CFO
The Fractional CFO from PPS took leadership of the financing effort, providing strategic financial guidance and oversight throughout the process. In the context of an SBA 7(a) loan for a partnership buyout, there are many key benefits that a CFO brings to the table:
1. Selecting the Right Lender: With their industry expertise, the Fractional CFO assisted in identifying and selecting the most suitable lender for the business’s SBA 7(a) loan. They compared terms, interest rates, and repayment schedules to find the best fit for the company's needs.
2. Financial Analysis and Forecasting: The PPS Fractional CFO evaluated the company's financial health, identifying strengths and weaknesses and preparing forecasts that the Bank found highly reliable through the financing process.
3. Business Valuation: Valuing a business accurately is crucial for a successful buyout. The Fractional CFO worked directly with the Bank’s valuation team to ensure the company's worth negotiated in the dispute resolutions was upheld by the external valuation, thus validating that the buyout price was fair and reasonable.
4. Loan Readiness: To secure an SBA 7(a) loan, a business must meet specific eligibility criteria and submit a slew of documents. The Fractional CFO prepared the company to meet these requirements, optimizing the chances of loan approval. They then worked with the Bank to make sure all of the hurdles to financing were overcome.
5. Business Plan: Lenders require a well-structured business plan with detailed financial projections based on solid operations. The Fractional CFO created reasonable and realistic financial forecasts, demonstrating the company's ability to generate sufficient cash to cover the debt service on the loan.
6. Facilitating Communication: The Fractional CFO acted as the bridge between the company and the lender, ensuring clear and effective communication throughout the loan application and closing process.
The Result
In the end, the loan was funded for the maximum possible under the SBA 7(a) program - $5 million. This resolved the partnership dispute and set the company on a path to growth. The vision of the surviving founder can be achieved with the support and strategic partnership of the PPS CFO going forward. In addition, the departing partners were able to unlock their capital from the partnership to pursue more harmonious business endeavors based on their individual needs – a true Win Win scenario for all parties.
PPS Solutions is proud of its role in helping to solve this very unique scenario. We don’t believe that the dispute would have been resolved or the financing achieved without the involvement of a seasoned veteran. The Bank itself sent this note directly to the CFO on closing the loan transaction:
“I also wanted to make sure you knew how much your expertise and attention to detail played a part in the approval and closing of this loan request. We truly would not have been able to complete this loan request without you and your guidance of the owner. Our senior credit manager was able to become comfortable with the many hurdles that accompanied this request because you had such a great understanding of the business. Your attention to detail, paired with the ability to organize and mitigate the negative aspects truly won us over. Anyone who is fortunate enough to have you on their side is on their way to success and I look forward to working with you again in the near future.”
PPS can help your business
Whether your business is facing challenges similar to the scenario laid out here, something more mundane, or even more challenging, PPS Solutions believes that having a strategic financial partner will lead to a better outcome. We provide not only fractional finance and CFO services, we provide the peace of mind that someone is there to support your entrepreneurial journey.