How to Buy Out a Business Partner: Price, Funding, and the Cash the Business Can Carry

Your partner wants out, and the number on the table is $2 million for their half. You can probably find a way to write that check. What you need to know is what the business looks like after it's paying for it.

Buy out a partner in this order: agree on how the price is set, replace the departing partner's work in the numbers, test whether the business can carry the payments with room to spare, and only then choose the funding. Reverse that order and you agree on the price over coffee, then find out at the bank that the payments don't fit.

This is for co-owners of US service businesses doing $2M–$15M in revenue where one partner is leaving and the other is staying.

Step 1: Find out what you already agreed to

Before anyone hires an appraiser, read the operating agreement or shareholder agreement. Many include a buy-sell provision that already sets:

• The trigger: voluntary departure, retirement, disability, death, or deadlock.
• The price mechanism: a fixed agreed value, a formula, or an independent appraisal.
• The payment terms: lump sum, or installments over a set number of years.

If the agreement has a mechanism, use it or formally amend it. Partners who skip their own agreement and settle on an informal number create problems later. In Connelly v. United States (2024), the surviving owner and the estate skipped the outside appraisal their agreement called for and settled on $3 million. The IRS later valued the same shares at about $5.3 million for estate tax.

If there's no agreement, you're negotiating from scratch. Get an independent valuation. If you plan to use an SBA loan, the lender will order its own valuation anyway, so start there.

Step 2: Replace the departing partner in the numbers

A buyout changes the P&L in a way most owners forget. It's the same owner-replacement test an outside buyer runs in financial due diligence. The departing partner did a job. Someone has to do it now, and that person costs money.

• If they ran sales or managed key clients, budget a hire at market salary plus payroll taxes and benefits.
• If you'll absorb the work yourself, be honest about what stops getting done.
• Remove the departing partner's salary and perks, and add the replacement cost.

The net change can go either way. A partner paid $200,000 whose role can be filled for $150,000 improves earnings by $50,000. A partner who personally billed 1,400 hours a year can't be replaced at their salary.

Step 3: Test the payment against the cash the business throws off

Lenders use debt service coverage: DSCR = cash available for debt service ÷ annual principal and interest. Our DSCR guide covers the lender adjustments in detail.

For a partner buyout, build cash available for debt service like this:

EBITDA after the replacement hire − maintenance capex − owner tax distributions − remaining owner's pay above what's already in the P&L = cash available for debt service.

The SBA minimum for an owner buyout is 1.25x (more on that below). Bennett's planning rule is stricter: don't sign a buyout that projects below 1.5x after the remaining owner takes a market salary. A buyout that only works at 1.25x leaves no room for losing a client in year two.

Two ways to fund the same hypothetical $2M

Here's a hypothetical $5M-revenue IT consulting firm owned 50/50. Each partner earns $200,000. EBITDA after both salaries is $700,000. The departing partner's role will be filled by a hire costing $150,000 fully loaded, so EBITDA rises to $750,000. After $30,000 of maintenance capex and $180,000 of owner tax distributions, cash available for debt service is $540,000.

The agreed price for the departing partner's 50% is $2,000,000.

Option A clears Bennett's 1.5x rule. Option B fails it, even though the departing partner is offering the cheaper interest rate. The difference comes from the term: a shorter amortization means bigger payments.

There's a middle path, too. Pair a smaller bank loan with a modest partner note, and stretch the note to five years or more. Run each version through the same table before you pick one.

If you can't yet say what the business earns once your partner's salary, perks, and personal spending are taken out, the buyout price is a guess. A Profit & Tax Leak Check shows where margin, payroll, or tax leaks sit in the business you're about to own outright, before the price is locked.

What the SBA requires for an owner buyout

SBA's current rules are in SOP 50 10 8.1, effective October 1, 2026, Appendix 15. For an Owner Buyout, the key ones are:

• Who qualifies. The remaining owners, or employees buying in, must have actively participated in the business for at least the last 24 consecutive months. Individuals employed for less than 24 months may acquire less than 50% of the equity and can't become the largest shareholder. Otherwise, the deal is underwritten as an initial acquisition.
• Equity injection. The minimum is 10%, based on the purchase price in the purchase agreement. The lender may reduce or eliminate it if the business has enough liquidity and working capital after the transaction, and it didn't have a negative net worth at the last fiscal year-end.
• Coverage. The minimum DSC is 1.25:1, measured on the last fiscal year-end or a two-year average.
• Term. Amortization on the change-of-ownership portion can't exceed 10 years.
• No QoE requirement. Owner buyouts are exempt from the quality of earnings requirement, because the remaining owners already know the business. A business valuation from a qualified source is still required. The SOP lets the lender value the business itself only when the purchase price is $350,000 or less and there's no close relationship between buyer and seller. Co-owners should assume they need an outside valuation and confirm it with the lender.
• Partial exits. If the selling partner keeps less than 20%, they must personally guarantee the full loan for at least two years after final disbursement.
• Ownership eligibility. All direct and indirect owners must be US citizens or US nationals with their principal residence in the US.

Redemption or cross-purchase: who actually buys

There are two basic structures:

• Redemption. The company buys back the departing partner's interest. The business is the borrower, and the payments come straight from company cash.
• Cross-purchase. You buy the interest personally, usually funded by company distributions to you. This adds a tax layer, because you may need to take taxable distributions to make after-tax payments.

For a partnership or LLC taxed as one, payments that liquidate a retiring partner's interest fall under IRC §736. Payments for the partner's share of partnership property are treated as distributions. Payments that depend on partnership income are treated as a distributive share. Fixed payments are treated as guaranteed payments.

The detail service firms trip on is §736(b)(2)–(3). Where capital isn't a material income-producing factor and the retiring partner was a general partner, payments for unrealized receivables and goodwill aren't treated as payments for property unless the partnership agreement provides for a goodwill payment. How the agreement is drafted changes who deducts what and who pays ordinary-income tax. Get your CPA into the drafting, not just the filing.

Four mistakes that sink buyouts

1. Paying for growth the leaver won't help deliver. Price is often set on next year's forecast. Base it on trailing earnings with the replacement hire built in.
2. Draining working capital to fund the down payment. The SOP states that if a lender waives the equity injection, working capital for the transaction must come from existing cash or a line of credit. Run a 13-week cash forecast before close.
3. Forgetting the non-compete and client transition. A partner who leaves with the client relationships takes part of the price with them. Tie part of the payment to a defined transition.
4. Ignoring what the buyout does to value. The remaining owner now carries all the owner-dependence risk that buyers discount. Plan for who replaces you, too.

The decision

Build the example table with your own numbers: EBITDA after the replacement hire, cash available for debt service, and two or three funding options. If none of them reaches 1.5x, the price is too high for the business to carry. Renegotiate the price or stretch the terms before you sign anything.

Fractional CFO support can build that model and package it for a lender. If you suspect the business earns less than either of you thinks once personal spending is stripped out, a Leak Check is a quick first read on where the cash goes before you commit to paying for half of it.