By Chris Lehnes, Vice President of Business Development, CIT Small Business Lending Corporation

You have worked together for years to ensure the success of your partner-owned childcare facility. Together with your business partner, you have shared visions, missions, business strategies, hard times and, presumably, good times. Now it’s come time to make a go of it on your own. You have been presented with the opportunity to buy out your partner, and acquire sole ownership of the child care center you have shared until now. The catalyst could have been any of the most common scenarios -- retirement, failing health, death, differences in business philosophies, or one partner’s desired freedom to pursue other interests. On the other hand, an unforeseen circumstance could have led to your pursuit of 100 percent ownership. Regardless of the path, due to the significant growth and consequent turnover in the industry, child care business owners all over the country are being faced more frequently with the opportunity to buy out their partners. Following these six easy steps can help make your partnership buy-out a positive and painless process.

1. Involve third parties. Having nurtured and developed your small business over the years, it has become your livelihood and something very personal. Your partner may also have those ties, but may have a different, more inflated view of the business (to capitalize on his/her share). Therefore, when a partner decides to sell his/her portion of the business, it is important to enlist the expertise of non-interested, third party consultants such as attorneys, accountants, and appraisers. These professionals can provide much needed objectivity as they assess the business from an impartial view. They can also help preserve your relationship with your partner, so it exists long after your business interests are dissolved.

2. Figure out what your business is worth. It is easy to determine a value for hard assets such as land, real estate and equipment. However, the intangibles that go into building a successful business are much more difficult to calculate. If your child care center is part of a franchise, that franchise may offer support, including data on how much your business may be worth, or help in valuing it. To ensure that the valuation of your business includes every variable, including those soft assets, here are some items to consider:

• Trade Name: This is more subjective if it represents an independent child care center, as opposed to a franchise. However, building equity in an independent child care center name often takes more work. Does it have a positive reputation in your primary service market? If so, there is a value attached to that.
• Customer List: How old are the children currently in your program? The older they are, the less time they will have with you, and the less they will contribute to the future success of your business.
• Waiting List: How long is it? If you have an opening, how quickly will you be able to fill the vacated position? It’s no secret that the future of your business depends on a long waiting list of young children.

3. Evaluate your key employees. It is important to consider whether your key employees are likely to stay with you once your partner leaves. Or, will your partner’s departure create staffing challenges? In addition, make sure that you and all of the remaining employees have met any necessary state child care licensing agreements. If your partner was specifically named as one of the licensees, it may be legally required to have someone else to replace him/her.

4. Plan ahead. Find out if your partner has any plans to continue in the child care industry. Regardless, make sure that you incorporate a non-compete clause into your partnership agreement. This states that he/she cannot enter the same type of industry within a set geographic area for a certain number of years. A typical agreement (which can be negotiable) may cover a distance of 2 to 10 miles from your current location, and range from 5 to 10 years in duration. If you want the terms increased, be prepared to pay a higher price for that extended agreement.

5. Structure a strong transaction for the lender. Lenders are often partial to partnership buy-outs. This is because the lender will be financing someone who has a successful history in the line of business in which they will be investing. Consequently, this minimizes the lender’s risk.

Be sure to do your homework before setting up an initial consultation with a lender. The entire process can take from 6 to 8 weeks, but can move faster with a more motivated buyer and/or seller. The lending process will also move faster if you anticipate a lender’s questions, and have your answers ready.

Be flexible in considering different lending scenarios. You may not have to borrow the full amount of the deal from a lender. A stronger transaction may have the seller financing some of the project., Think about financing a portion of the purchase through your lender, and the balance through the seller, paid monthly over a designated term. You and your lender will be more comfortable if the seller has a vested interest in the continued success of the business. This will prevent the seller from acting in any way that would potentially endanger the business. In some cases, it is beneficial to both parties to have the seller remain onboard as a consultant to help smooth the transition.

If your center has been suffering because of the partnership, a business plan may be necessary to show your lender how you plan to turn it around. Perhaps the selling partner was disruptive, or not as good with children. Maybe he/she was an absentee owner concerned only with profits, and not with the daily operation. These are key points your lender will need to know.

Additionally, if your transaction involves multiple locations, explain how you will be able to manage them all effectively. Logistics are important, especially if it is impossible to commute between the multiple locations. If you will rely on key employees to run the business in your absence, the lender may request copies of their resumes to verify employment history, competency and experience level.

Remember, impressing a lender with your preparation can go a long way toward closing the deal sooner, rather than later.

6. A few more tips. Many lenders require collateral, but a child care center in a leased building (which is most common in the industry) typically does not have significant fixed assets. That is why an SBA (Small Business Administration) loan can be a preferred method of financing, particularly for a partnership buyout deal. Some borrowers who qualify for an SBA loan gain the significant advantage of putting no new money down. The lender may be able to rely on existing equity built up in the business. This is a key benefit to business owners who have the majority of their assets already tied up in the business. The SBA will guarantee 75% of the loan, or a maximum of $1 million. In order to be eligible for an SBA loan, the remaining partner must acquire 100% equity in the business.

When choosing a lending source, consider the following:

• Non-bank lenders offer longer term, fully amortized loans with no balloon penalties. Longer terms mean smaller monthly payments for the borrower. Banks often require loans to be repaid within 5 to 15 years, yet non-bank lenders can extend their loans for up to 25 years. This allows a borrower to retain more cash that can be invested in the business to help it grow.
• Banks typically require significant down payments and are very selective about the collateral they will accept to secure a loan. Non-bank lenders can be more innovative, and are more likely to evaluate cash flow, which can be used to mitigate collateral risk. In addition, non-bank lenders are not self-restricted through geographic boundaries, as banks may be with their charters.
• Non-bank lenders are specialists and can typically close a deal faster. While banks offer other peripheral products (such as checking and savings accounts, auto loans, and certificates of deposit), non-bank lenders offer the experience and timely response of niche players who concentrate on just one thing – small business lending.
• It is easier to compare the true cost of a loan with non-bank lenders. Banks often cross-collateralize (car, home, business, etc.), packaging everything into one deal. They may ask to control your checking account and monitor your funds. They may also establish such parameters as an officer salary cap or institute a debt-to-net-worth requirement that limits your leveraging ability. If a bank limits your debt, you may not be able to obtain an additional loan, which could, for example, be used to offset sudden, accelerated growth. With timely payments made to a non-bank lender, you have the freedom and flexibility to run your business as you see fit without interference.