How to Finance a Partner Buyout
Complete guide to financing the purchase of a business partner's ownership stake, including valuation and deal structuring.
Buying Out Your Business Partner
Partnership changes happen—retirement, disagreements, different life priorities, or simply one partner wanting to exit. When you need to buy out your partner's ownership stake, you typically need financing to accomplish it without draining the business or your personal resources.
Partner buyouts are treated as business acquisitions by lenders, with similar documentation and underwriting requirements.
Valuing the Partnership Interest
Buyout price depends on business valuation and ownership percentage:
- Fair market value (FMV) of entire business
- Times departing partner's ownership percentage
- Less any discounts (minority interest, lack of marketability)
- Plus or minus adjustments per partnership agreement
Review your partnership/operating agreement first. Many agreements include buyout formulas, valuation methods, or right-of-first-refusal provisions that affect how the buyout is structured and priced.
Common Valuation Methods
Business valuations use several approaches:
| Method | Best For | Typical Multiple |
|---|---|---|
| Multiple of earnings (SDE) | Small businesses | 2-4x SDE |
| Multiple of EBITDA | Larger businesses | 3-6x EBITDA |
| Asset-based | Asset-heavy businesses | Net asset value |
| Comparable transactions | When market data exists | Industry specific |
| Book value | Simple, often undervalues | Stated book value |
Financing Options for Buyouts
Several financing paths support partner buyouts:
- SBA 7(a) Loan - Most common for buyouts under $5M. Up to 90% financing, 10-year term.
- Seller Financing - Departing partner carries note for part of price. Often combined with bank financing.
- Conventional Bank Loan - Faster than SBA, typically requires 20-30% down.
- Cash Flow from Business - Use business profits over time. Slowest but no external debt.
- Personal Assets - Home equity, retirement funds, personal loans.
SBA Buyout Financing
SBA 7(a) loans work well for partner buyouts:
| Feature | Details |
|---|---|
| Maximum amount | $5 million |
| Financing percentage | Up to 90% |
| Required equity injection | 10% minimum |
| Term | 10 years typically |
| Interest rate | Prime + 2.25-2.75% |
| Personal guarantee | Required from remaining owners |
| Seller standby note | Allowed if on full standby |
Structuring the Deal
Buyout deals often combine financing sources:
- SBA or bank loan: 60-80% of purchase price
- Seller financing: 10-20% on standby or subordinated
- Buyer equity: 10-20% cash injection
- Earnout: Portion tied to future performance (sometimes)
Example: 50% Partner Buyout
Scenario: Two 50/50 partners, business valued at $1.2M, one partner retiring.
| Component | Amount |
|---|---|
| Business valuation | $1,200,000 |
| 50% buyout price | $600,000 |
| Minority discount (15%) | ($90,000) |
| Adjusted price | $510,000 |
| SBA loan (85%) | $433,500 |
| Seller note (standby, 10%) | $51,000 |
| Buyer equity (5%) | $25,500 |
| Monthly SBA payment | ~$5,700 |
| Business cash flow | $180,000 annually |
| Coverage | Comfortable |
Tax and Legal Considerations
Buyouts involve important tax and legal issues:
- Asset purchase vs. stock/membership interest purchase
- Tax implications for both parties
- Non-compete agreements
- Release of personal guarantees
- Customer and vendor notification
- Name and trademark rights
- Consult attorney and CPA before finalizing terms
Common Buyout Mistakes
Avoid these errors:
- Not getting independent valuation
- Ignoring existing agreement provisions
- Over-leveraging the business
- Insufficient working capital post-buyout
- Not addressing all legal and tax issues upfront
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