Partner Buyout
Buy out your partner and pay them at closing, not over years
Most partnership agreements say a retiring partner gets paid monthly over a period of years, because when they were drafted that was the only way anyone could see to fund it. It is not the only way anymore. An SBA loan can fund the same buyout, pay the departing partner at closing, and leave the remaining partners owning the firm outright.
For the partner heading for the door, that is cash now instead of an unsecured claim on your own former firm. For the younger partners, it is full ownership without a decade of redirected distributions.
Because the buying partners already own part of the firm, the additional cash required can be low or, with the right lender, nothing at all.
A Deal We Almost Watched Go the Wrong Way
He was selling to a stranger to get paid at closing
A Florida firm owner had decided to sell to an outside third party. He had younger partners in the firm, people he had trained, and he was not unhappy with them. He was selling out because he wanted his money at closing, and his partnership agreement said that if he sold to his partners they would pay him monthly over a period of years.
When we explained that his partners could buy him out with SBA financing and that he would be paid at closing exactly as an outside buyer would pay him, his answer was simple. He would have done it that way if he had known.
That is the part that should bother every principal reading this. He was not choosing an outside sale over his own people. He was choosing the only funding mechanism he knew about. How many firms are sitting in exactly that position right now?
What Your Buy-Sell Agreement Actually Says
The agreement sets the obligation, not the funding
Open the buy-sell provisions in your partnership or shareholder agreement and you will usually find two things: a method for valuing a departing partner's interest, often a formula or book value set years ago, and a payout schedule that runs over several years.
That schedule exists for a reason. When these agreements are drafted, nobody assumes a bank will lend the firm several million dollars to buy out one partner, so the firm's own future cash flow is written in as the funding source. That was a sound assumption once. It is no longer the only one available.
Bank financing does not override anything you signed. It gives the partners a second way to satisfy the same obligation. The buyout is the same buyout. Where the money comes from, and when the departing partner receives it, is what changes, and your attorney documents that the partners agreed to it.
Two Ways to Fund the Same Buyout
Bank financing versus the installment payout in your agreement
The buyout is identical. One partner leaves, the others take full ownership. What differs is who funds it, when the departing partner sees the money, and who is exposed if the firm has a hard year.
When the departing partner is paid
- SBA-financed partner buyout
- At closing, in cash, when the deal funds.
- Installment payout under the agreement
- Monthly or annually, over a period of years set in the agreement.
Who carries the risk
- SBA-financed partner buyout
- The bank. It underwrites the firm and takes the repayment risk.
- Installment payout under the agreement
- The departing partner. They are an unsecured creditor of their own former firm.
Effect on the remaining partners' cash flow
- SBA-financed partner buyout
- One amortizing loan payment, sized by the bank against historical cash flow.
- Installment payout under the agreement
- Years of distributions redirected to the retiree before the remaining partners see the upside.
What happens if the firm has a bad year
- SBA-financed partner buyout
- The departing partner already has their money. The loan is a normal business debt.
- Installment payout under the agreement
- Payments to the retiree compete with payroll and overhead, and often get renegotiated.
Who ends up owning the firm
- SBA-financed partner buyout
- The remaining partners own it outright at closing.
- Installment payout under the agreement
- Ownership commonly transfers in steps as the payout schedule is satisfied.
What sets the price
- SBA-financed partner buyout
- An independent valuation on historical cash flow, the same basis the bank underwrites.
- Installment payout under the agreement
- A formula written into the agreement, sometimes years ago, that may not reflect the firm today.
For the Senior Partner
You do not have to sell to an outsider to get paid at closing
If you have concluded that an outside sale is the only route to cash at closing, check that conclusion before you sign a letter of intent. That belief is the single most common reason a firm leaves the hands of the people who built it.
In a bank-financed buyout your proceeds are funded by the lender and paid at closing, the same way a third-party buyer would pay you. The difference is who is running the firm afterward. Your name stays on the door, your clients stay with people they already know, and the partners you spent years training take it forward.
Plan on staying involved for roughly a year after closing, with your hours winding down. Buyers and lenders both want a real handoff, not a disappearance.
For the Younger Partners
What you need to bring
If you are a junior partner and this is news to you, it is probably news to your senior partner too. Here is what the deal actually asks of you.
Your existing stake counts
You are not starting from zero the way an outside buyer is. Lenders can treat the equity you already hold as part or all of the injection, which is what makes a low or no additional down payment possible.
The firm's cash flow carries the loan
Banks underwrite three years of historical performance, not projections. If the firm can cover the payments with room to spare, the deal is financeable regardless of what is in your savings account.
You will sign personal guarantees
Every owner holding 20 percent or more of the firm personally guarantees the SBA loan. That is part of why banks lend on these deals, and it is worth understanding before you raise the idea.
Why Partner Buyouts Are Different
Your existing ownership is your equity
In an outside acquisition, the buyer has to fund a full equity injection because they are starting from zero. A partner buyout is different. You already hold a stake in the firm, you already know the clients and the numbers, and you are already proven to the business.
Lenders can recognize that. The SBA sets no fixed down payment for a change of ownership between existing owners, leaving it to the bank, and the bank can treat your current equity as part or all of what is required. That is what makes a low or no additional down payment possible.
If you have not yet raised the subject with your senior partner, start there. The conversation is more welcome than most junior partners expect.
How It Works
A partner buyout, start to closing
The path is short because the buyers are already owners. Here is the sequence.
01
Value the firm and the stake
An independent valuation sets what the whole firm is worth and what the departing partner's share is worth, on the historical cash flow the bank will lend against. This is usually the first time the partners have seen a real number.
02
Compare it to what the agreement says
Put the agreement's formula and payout schedule side by side with a bank-financed number paid at closing. Both partners should see the two outcomes before anyone commits to either.
03
Agree to fund it differently
The buyout itself does not change. The funding mechanism does. Your attorney documents the partners' agreement to fund the same buyout with bank financing rather than the installment terms the agreement contemplates.
04
Structure the financing
An SBA 7(a) loan funds the buyout. Because the buying partners already own part of the business, their existing equity can reduce or, with the right lender, eliminate the additional cash required.
05
Close and continue
The departing partner is paid at closing, the remaining partners take full ownership, and the firm keeps running without missing a beat.
Rates and Terms
Predictable financing, paid at closing
The rate on an SBA acquisition loan reflects the bank's cost of funds plus risk, up to the SBA ceiling of Prime plus 2.75 percent floating. Terms run up to 10 years, fully amortizing, with no balloon payment.
The result is a clean handoff. The departing partner receives their proceeds in cash at closing rather than waiting on installments from the firm, and the remaining partners repay the bank out of the firm's cash flow. The same structure powers our Step-Up Legacy Plan and our employee buyouts.
Partner Buyout FAQ
Common questions about buying out a partner
- Our partnership agreement says a retiring partner is paid monthly over several years. Can we do it differently?
Yes, if the partners agree to. An SBA loan does not override a partnership agreement, and nothing here lets one side ignore what was signed. What it does is give the partners a second way to fund the same buyout. The agreement sets out how a departing partner's interest is valued and paid, and the partners can agree, with their attorney documenting it, to satisfy that obligation with bank financing at closing instead of an installment schedule.
- Why do most partnership agreements pay a retiring partner over time?
Because when the agreement was drafted, an installment payout was the only realistic option. Nobody assumed a bank would lend the firm several million dollars to buy out one partner, so the agreement made the firm's own future cash flow the funding source. That assumption is what has changed, not the fairness of the agreement.
- Can I buy out my business partner with an SBA loan?
Yes. An SBA 7(a) loan is a common way to finance a partner buyout. The loan pays the departing partner in cash at closing, and the remaining owners repay it out of the firm's cash flow over time, typically on a 10-year term.
- Do I need a down payment to buy out my partner?
Often less than you would expect, and sometimes none. The SBA leaves the equity injection on a partner buyout to the lender. Because you already own part of the business, your existing stake can count toward the requirement, and we work with a bank that can allow a qualifying partner buyout with no additional money down. The exact terms depend on the lender and the deal.
- I want to be paid at closing, so I am talking to outside buyers. Is that my only option?
No, and this is the most common mistake we see. Owners go to a third-party sale purely because they want cash at closing and believe an internal transition means waiting years for installments. Your younger partners can buy you out with bank financing and you are paid at closing, the same as you would be by an outsider, with the firm staying in the hands of the people you trained.
- How is a partner buyout different from an outside acquisition?
The buying partners already own part of the firm and know it inside out, so there is far less risk for a lender than an outside purchase. That existing ownership and knowledge is what can reduce or eliminate the additional cash they need to bring.
- How long does a partner buyout take?
Typically 3 to 6 months from the point the partners are ready to move, depending on how quickly financials are prepared and the lender processes the loan.
- What is the departing partner's stake worth?
It is a share of what the whole firm is worth, and firms with sales below $2M generally value on 1.5x to 4.0x SDE, and firms with $2M to $10M in sales on 4.0x to 8.0x EBITDA. Many agreements use a book value or a fixed formula written years ago, which frequently understates the firm. An independent valuation on historical cash flow is what a bank will lend against.
- What size firm does this work for?
This fits firms with sales between $1 million and $10 million, the same range where our SBA-financed employee buyouts work best. The firm needs enough cash flow to cover the loan payments comfortably.
Ready to Take Full Ownership
See what buying out your partner would take
Send us your partnership agreement and your last three years of financials. We will show you what the buyout looks like funded by a bank and paid at closing, next to what your agreement contemplates today.