How to Buy Out a Business Partner (2026 Guide)

While business partnerships often begin with optimism, circumstances can change, leading to a buyout. Whether a partner is retiring, pursuing a new opportunity, or the relationship has simply run its course, buying out a business partner is a complex process with numerous legal, financial, and tax consequences to consider.

This guide explains the steps to take, financing options to consider, and tax implications to understand before moving forward with business partner buyout negotiations in 2026.

When Does a Partner Buyout Make Sense?

Buying out a partner helps to ensure the business you've worked so hard to build continues. Scenarios where buying out your business partner makes sense include:  

• They're retiring.

• A voluntary exit occurs.

• Disputes and differences cannot be reconciled. 

• Strategic restructuring is commencing. 

• Death or disability. 

Clear communication from the start of the process is critical. It will help set the tone and manage expectations as negotiations advance. 

Step-by-Step: How to Buy Out a Business Partner

Review this step-by-step guide to learn how to buy out a small business partner.   

Step 1: Review or Create a Buy-Sell Agreement

It is optimal if you already have a business partnership buy-sell agreement in place. If your partnership lacks this buyout agreement, create one immediately with the help of an attorney. Your buy-sell agreement should define the terms and conditions whenever a partner wants to exit, and typically includes: 

• A valuation method to determine a fair price

• Business partner exit strategies and scenarios

• Payment terms

• Right of first refusal

Step 2: Work With an Attorney

Your attorney can help draft your buy-sell agreement and can also guide you through the buyout process. Working with formal legal representation is especially critical if the buyout isn’t amicable. The attorney can help clarify the necessary legal steps to execute the buyout transaction.

Your attorney ensures compliance with: 

• Your partnership Operating Agreement

• Applicable state laws.

Step 3: Engage a Business Accountant

Your business accountant plays a vital role during a partner buyout.

Partnership accounting is one of the most complicated sections of the tax code. Your accountant can help make sense of the tax rules that govern partnership agreements, while ensuring: 

• Accurate books

• Proper valuation

• Correct allocation of partner's equity

To perform the valuation, your accountant will first need to prepare a current set of financial statements:

• Balance sheet – provides a glimpse of your business's financial position for a specific period. It details assets, liabilities, and owners' equity.

• Income statement – also known as a profit and loss (P&L) statement, it reports revenue, expenses, and net income. 

• Cash flow statement – this is a summary of cash going in and out of your business. 

• Equity accounts – details each partner's claim of your business's net worth, including profit, capital, and withdrawals. 

Valuing the Business for a Partner Buyout

You must determine the value of your business before a partner buyout is finalized. There are three common valuation approaches: 

• Asset-based

• Income-based

• Market-based

If a valuation method is stipulated in your buy-sell agreement, your business accountant can play a vital role in determining fair market value. However, valuation disputes are common and often necessitate hiring a third-party valuation specialist, sometimes called a certified business appraiser. This third-party specialist promotes fairness and eliminates any perceived conflicts of interest. They will conduct an independent business valuation to determine your business's value using one of the common valuation approaches.    

Insurance Considerations During a Buyout

Insurance helps protect partners who remain with the business and those who depart.

Life and disability insurance play a crucial role in mitigating risks during a buyout. If one of the remaining partners dies or becomes incapacitated, the departing partner wants a guarantee that they will still receive the full agreed-upon sales price for their share of the business. Disability and life insurance ensure the partner gets their share of the business.

Consider regularly reviewing your insurance policies to ensure they reflect the partnership’s current value and its active partners.

How to Finance a Partner Buyout

You may need to borrow money to buy out your partner. Here are several options to consider for partner buyout financing:

• Self-funding / Seller financing. Using this method, the exiting business partner serves as the lender, with payments made over a defined period instead of a lump sum payment. If the exit is amicable and the payment terms are clear, self-funding is a great option. This option won't work if the buyout is contentious. 

• SBA 7(a) loan. The Small Business Administration (SBA) offers loans to help with business purchases and buyouts. One of the more popular small business loan types is 7(a), designed specifically for starting or expanding through a strategic acquisition, such as buying out a partner. This SBA loan offers low rates and long terms, but 7(a) loans require extensive paperwork and might need a personal guarantee to secure financing.

• Traditional bank loan. A traditional loan from a bank can be optimal if you qualify and helps build your credit. Many traditional banks shy away from financing a buyout because there’s a risk that the partnership (or new ownership structure) may experience a financial downturn following a partner’s departure. 

• Alternative lenders. Alternative lenders are typically more flexible in every step of the loan process — from a short application to a funding decision that happens in days, not weeks, and quick access to funding if you are approved. They typically have higher interest rates and are subject to fewer regulations than traditional banks. 

• Earn-outs. In this scenario, the exiting partner continues working for the partnership while receiving payments from the buyout. This arrangement sometimes includes a clause that increases the buyout payments if the partnership meets certain revenue and profit benchmarks. The increased payments aren't guaranteed, and conflicts can arise over whether benchmarks were met. 

Tax Implications of Buying Out a Business Partner

An area often overlooked in a buyout is how the transaction is taxed. Here are some of the more critical partner buyout tax implications to be aware of.

Guaranteed Payments

Money received as a guaranteed payment indicates that the exiting partner receives monthly payments similar to a salary. These payments are tax-deductible to the partnership and taxed at rates up to 37% for the exiting partner.

For example, if the monthly payment is $10,000, that amount can typically be deducted as a business expense, while the recipient pays tax on it. The recipient may also be responsible for self-employment tax. 

Payments for “Normal” Assets

Money received as a share of “normal” assets indicates that the exiting partner receives monthly payments representing their share of the business's assets. The departing partner is taxed up to 23.8% on the difference between total payments received and the partner’s tax basis. These payments are not tax-deductible to the business.

For example, a partner buyout amount of $250,000 has been agreed upon. If $50,000 is paid at closing, the remaining amount will be paid with interest within a predefined period, usually several years.  

Payments for “Hot” Assets

Most “normal” assets are taxed up to a rate of 23.8%, while “hot” assets can be taxed up to a rate of 37%. “Hot” assets are those that can generate future income, such as accounts receivable and inventory. "Hot" assets are treated as ordinary income rather than capital gains by design. 

Poor buyout planning can significantly increase the tax bill for both the business and the departing partner.

Common Mistakes to Avoid During a Partner Buyout

There are several common mistakes that you should avoid when attempting to buy out a partner. These include: 

• Skipping professional guidance

• Ignoring tax consequences

• Poor valuation documentation

• Inadequate financing planning

• Not updating insurance

• Rushing the process

Get Professional Help Before You Proceed

A partner buyout is one of the most complex transactions a small business owner can face. Legal or tax missteps can cost tens of thousands of dollars, stifling momentum and causing undue stress. Attempting this process on your own without the guidance of legal or tax experts may extend the process or put your business in jeopardy.

That's where 1-800Accountant, America's leading virtual accounting firm, comes in. Our CPAs and business tax experts help structure partnership buyouts correctly, minimize tax exposure, and keep your business moving forward, all for a transparent, tax-deductible fee. Talk to a business tax expert today so you can commence with a successful buyout with confidence.