Guide
Buying Out a Business Partner
A partner buyout is a business sale where the buyer and the seller already know everything about each other, have to keep working together while it is negotiated, and frequently have a personal relationship at stake. That combination makes it harder than selling to a stranger, not easier. The transactions that go well are the ones where both sides agree on the valuation method before either side hears a number.
Start by finding out whether the answer is already written down
Read the operating agreement, the partnership agreement and any buy-sell agreement before doing anything else. Many contain a valuation method, a right of first refusal, a mandatory offer sequence or a payment schedule, and those provisions control regardless of what either of you now thinks is fair.
If a method is specified, that is the starting point even if one side dislikes it. Arguing against your own signed agreement is an expensive way to lose slowly.
If nothing is written down, agree the method before anyone produces a number. Once a figure is on the table it becomes an anchor, and the conversation turns into a negotiation about that figure rather than a discussion about how to arrive at one.
How to value a partner's share
Value the whole business first. Recast earnings into Seller's Discretionary Earnings or EBITDA, apply the market multiple for the industry and size, and settle enterprise value before anyone divides anything.
Then take the departing partner's percentage of it, and adjust for debt and any partner loans or capital account differences.
Then consider whether discounts apply. A minority interest that cannot control decisions is worth less per point than a controlling one, and an interest in a private company that cannot easily be sold to anyone else is worth less again. Discounts for lack of control and lack of marketability are standard in appraisal practice and are frequently the largest single item in dispute.
Whether discounts should apply in a buyout between existing partners is genuinely arguable, and the answer often sits in the agreement you read in the previous step.
Why the two sides disagree in exactly the same way every time
The departing partner values the business on what it could become and points at the pipeline. The remaining partner values it on what it has done and points at the risk they are about to carry alone.
The departing partner sees a percentage of a whole. The remaining partner sees a minority stake with no control and no market, and wants the discount that reflects it.
The remaining partner is usually also the one who has to fund the purchase, which makes them acutely aware of debt service in a way the seller is not.
None of this is bad faith and knowing it is coming helps. An independent valuation, agreed in advance as binding or near-binding, converts an argument about motives into an argument about method, which is a much shorter argument.
How buyouts actually get funded
A seller note is the most common instrument by far: the departing partner is paid over three to seven years out of the cash the business generates. It is simple, it requires no lender, and it leaves the seller exposed to how well the business performs after they lose any control over it.
SBA 7(a) financing can be used for a partner buyout, and it is a well-trodden path, but the programme has specific conditions around what the resulting ownership must look like and what the seller may retain afterward. The rules are detailed and they change, so confirm current requirements with a lender who does these regularly before you build the deal around them.
Conventional bank debt where the business has hard collateral, and outside investment where you are willing to replace one partner with another.
An earnout, where part of the price depends on future performance. Sensible in principle, difficult in practice here, because the departing partner no longer controls the levers that determine whether it pays and will reasonably suspect that it will not.
When you cannot fund the buyout
Say so early. A remaining partner who spends nine months trying to arrange financing that was never going to happen has burned the option that was actually available.
The realistic alternatives are to extend the payment period, to bring in an outside investor, or to sell the whole business and both take proceeds. That last one is not a defeat. Two partners selling a healthy business together frequently net more each than a strained buyout leaves either of them with.
There is also a structural argument for it: a business carrying heavy buyout debt is a weaker business and a harder one to sell later. If the buyout would require terms that leave the company fragile, selling the whole thing is often the better financial outcome for both of you.
Find out what your business is worth
Five inputs, a real market range in seconds. Free and confidential.