How to Finance a Manufacturing Partner Buyout
Many manufacturing companies are owned by two or three partners who started or bought the business together. Over time, their goals diverge. One partner wants to retire, another wants to keep growing. One wants to invest in new equipment, another wants distributions. Sometimes a partner dies or becomes disabled, and the remaining owner must buy the share from an estate.
A partner buyout lets one owner, or a group of remaining owners, purchase another owner’s interest while the business continues operating. Because the remaining partner rarely has enough cash to pay for the departing partner’s share, financing is usually required. This guide explains how manufacturing partner buyouts are valued, structured and financed.
What Makes a Manufacturing Partner Buyout Different
Partner buyouts are simpler than outside acquisitions in one important way: the buying partner already runs the business, so lenders have less transition risk to worry about. But manufacturing adds specific complications:
- Divided responsibilities. Partners often split roles, such as one running the shop floor and one handling sales and customers. When one leaves, the remaining owner must cover the departing partner’s function.
- Capital intensity. The buyout debt must be serviced while the business continues investing in equipment and carrying inventory and receivables.
- Real estate. Partners frequently co-own the facility in a separate entity, so the buyout may involve both the operating company and the building.
- Valuation disagreements. Partners may disagree on what the equipment, customer relationships and real estate are worth.
Start With the Buy-Sell Agreement
Before discussing financing, review your existing buy-sell or operating agreement. It may already specify:
- Events that trigger a buyout, such as retirement, death, disability or departure.
- How the price will be determined, such as a formula, a fixed value updated periodically or an independent appraisal.
- Payment terms, including whether the buying partner may pay over time.
- Whether life or disability insurance funds part of the purchase.
If the agreement is outdated or silent, the partners will need to negotiate these terms, ideally with separate legal counsel. A price set by an outdated formula may bear little relationship to what a lender will finance.
Determining the Buyout Price
The departing partner’s share is usually based on the value of the whole company multiplied by their ownership percentage, although agreements sometimes apply discounts or premiums. Manufacturing companies are valued primarily on normalized cash flow, adjusted for factors such as customer concentration, equipment condition and whether real estate is included. Our guide to manufacturing business valuation covers those drivers in detail.
An independent valuation is often worth the cost in a partner buyout. It gives both sides an objective starting point, reduces conflict and provides the lender with support for the price.
Financing Options for a Partner Buyout
SBA 7(a) Loans
SBA 7(a) loans can be used to finance a change of ownership between existing owners of an eligible small business, subject to program rules and lender approval. SBA rules address partial changes of ownership, how the remaining owner’s equity is evaluated and when the departing owner must be fully bought out. These rules have been updated recently, and SBA 7(a) and 504 loans that receive an SBA loan number on or after October 1, 2026 fall under the updated standard operating procedure, which includes revised change-of-ownership categories. Your lender will determine how the rules apply to your buyout. See our overview of SBA loans for manufacturing businesses.
Conventional Loans
Established manufacturers with strong cash flow and collateral may qualify for conventional business loans to fund a partner buyout. Conventional lenders may require more equity or shorter terms than SBA programs but can offer flexibility on structure.
Seller Financing From the Departing Partner
The departing partner often receives part of the price over time through a promissory note. This reduces the cash needed at closing and gives the departing partner an ongoing interest in the business’s success. The lender will set requirements on how a seller note is subordinated and repaid.
Equipment and Real Estate Equity
If the company owns equipment or real estate with equity, that value may support the financing. Unencumbered equipment can be pledged as collateral, and a facility with equity may be refinanced. Our article on refinancing manufacturing debt explains how existing loans can be consolidated as part of a larger restructuring.
Insurance Proceeds
Where partners carried life or disability insurance to fund a buyout, those proceeds can cover some or all of the price when a partner dies or becomes disabled.
Handling the Real Estate
When partners co-own the plant, there are several options:
- The remaining partner buys the departing partner’s share of the real estate along with the business interest.
- The departing partner keeps their real estate interest and continues receiving rent under a long-term lease.
- The real estate is sold to a third party and leased back, freeing capital for the buyout. See our guide to manufacturing sale-leasebacks.
Real estate can often be financed separately on longer terms through SBA 504, SBA 7(a) or conventional real estate loans, which can reduce the monthly burden of the overall buyout.
What Lenders Look For
- Cash flow after the buyout. The business must support the new debt and pay the remaining owner, and any replacement for the departing partner’s role, a reasonable salary.
- Coverage of the departing partner’s role. If the departing partner ran sales or managed key customers, lenders want to know who will take over.
- Customer continuity. Will customers who worked with the departing partner stay?
- Equity and structure. The remaining partner’s existing ownership, any cash contribution and the terms of any seller note.
- Capital needs. Near-term equipment replacement or expansion plans that will compete with debt service.
- Working capital. The buyout should not drain the cash the business needs to operate.
Steps to Complete a Partner Buyout
- Review the buy-sell agreement and consult separate attorneys for each partner.
- Obtain an independent valuation of the business and, if applicable, the real estate.
- Meet with a lender early to understand what can be financed.
- Negotiate price, payment terms, any seller note and the departing partner’s transition role.
- Plan how the departing partner’s responsibilities will be covered.
- Complete financing, legal documents and ownership transfer.
- Communicate the change to employees, customers and suppliers.
Frequently Asked Questions
Can I use an SBA loan to buy out my partner?
SBA 7(a) loans can finance partner buyouts for eligible businesses, subject to current change-of-ownership rules and lender approval.
Do I need a down payment for a partner buyout?
Lenders generally consider the remaining partner’s existing ownership and any cash contribution. Specific equity requirements depend on the lender and program.
What if my partner and I disagree on value?
An independent appraisal is the most common way to resolve disagreement. Your buy-sell agreement may also specify a valuation method.
Can the departing partner stay involved?
Sometimes, for a transition period. Lender and program rules may limit how long and in what role, so confirm before agreeing to terms.
US Professional Funding helps manufacturing owners finance partner buyouts through SBA and conventional loans, real estate financing and debt restructuring. Learn more about our manufacturing ownership-change financing or estimate payments with our SBA loan calculator.
