Pricing a partner's buyout and paying for it are two different problems, and the second one is usually the harder of the two. A remaining partner rarely has the full amount sitting in cash, which means the buyout's actual terms, not just its headline price, decide whether the business survives the transition. Four routes cover nearly every real buyout: a note from the departing partner, an SBA 7(a) loan under the rules that took effect October 1, 2026, a conventional bank term loan, and an earnout tied to future performance. Each shifts the risk differently, and the worked example below prices two of them side by side on the same $480,000 buyout.

The seller note: the partner leaving is, in effect, the bank

A seller note lets the remaining partner pay over time, typically three to seven years, directly to the partner who is leaving, secured by a pledge of the bought interest and often a personal guarantee. It needs no bank underwriting and closes on whatever terms the two partners agree, which makes it the fastest route and the one most available to a business a bank would not yet lend to.

The rate has to clear the IRS's applicable federal rate (AFR) for the note's term, published monthly under 26 U.S.C. §1274; a rate set below the AFR is recharacterized using the AFR as the discount rate, turning part of what looks like principal into imputed interest income regardless of what the note says. The departing partner is carrying the risk of the business failing to pay, which is exactly why a note usually comes with security (a pledge of the interest, a UCC filing on business assets) and a personal guarantee rather than relying on the business's promise alone.

SBA 7(a): the October 2026 rules for a partner buyout

An SBA 7(a) loan can fund a buyout where a bank would not lend unsecured and the business cannot carry a full seller note alone. The SBA's lending rules changed on October 1, 2026 under SOP 50 10 8.1, with the change-of-ownership requirements for a partner buyout now in Appendix 15 of the SOP.

What the October 2026 rules require for a partial change of ownership

  • At least one original owner stays with the business and personally guarantees the loan
  • The remaining owners buying out the departing partner must have actively managed the business for at least the last 24 consecutive months
  • The buyers inject equity of at least 10% of the purchase price (the lender may reduce or waive this if the business has enough liquidity and working capital and showed no negative net worth at the last year end)
  • A seller note can supply no more than half of that 10% injection, and only if it is fully subordinated and on complete standby, no principal or interest paid, for the whole SBA loan term
  • A selling owner who stays with less than a 20% stake must personally guarantee the full loan for at least two years after it funds
  • The lender requires debt service coverage of at least 1.25 times the loan payments
  • The rate on a loan over $350,000 is capped at the base rate plus 3 percentage points

The seller-note standby rule matters in practice: a note that starts paying the departing partner anything during the SBA loan's term does not count toward the required equity injection, which pushes many buyouts toward cash-plus-SBA-loan with little or no seller note, or a seller note that only begins paying after the SBA loan is further along. The partner buyout calculator applies these rules directly: putting a share of the price in the SBA loan box checks the equity injection against the cash and any standby seller note automatically.

Bank term loan and earnout: the other two routes

A conventional bank term loan, outside the SBA program, is available to an established business with collateral and strong cash flow, at the lender's own underwriting standards rather than the SBA's; it usually closes faster than an SBA loan but requires a stronger balance sheet to qualify at all, and most lenders still want a personal guarantee from the remaining owner.

An earnout ties part of the price to the business's performance after the buyout, paying the departing partner more if the business does well and less if it does not. It is the one structure that protects the remaining partner from overpaying for growth that does not show up, but it also keeps the departing partner financially tied to a business they no longer control, which is a real cost to them and a frequent source of later disputes over how the earnout's metrics are measured. Life insurance only funds a buyout triggered by death, covered in what happens when a business partner dies and buy-sell agreement for business partners; it is not a financing option for a buyout agreed between two living partners.

A $480,000 buyout, two structures compared

Financing a $480,000 buyout: 20% cash plus a 5-year seller note, versus an SBA 7(a) loan with the minimum equity injection

Both structures buy the same $480,000 interest. Structure A: 20% cash at closing, the remaining 80% on a 5-year seller note at 7%. Structure B: the SBA minimum 10% equity injection in cash, with the balance financed by a 10-year SBA 7(a) loan at 10% (the base rate plus 3 points, per the October 2026 cap, assuming a base rate near 7%).

Structure A: cash at closing (20%)$96,000
Structure A: seller note financed (80%)$384,000 at 7%, 5 years, $7,603.66 a month
Structure A: total interest paid over the note's term$72,219.61
Structure B: cash equity injection (10%)$48,000
Structure B: SBA loan financed (90%)$432,000 at 10%, 10 years, $5,708.91 a month
Structure B: total interest paid over the loan's term$253,069.42

Structure A costs less in total interest and asks for more cash up front; structure B asks for far less cash at closing but costs more than three times as much in interest over a longer term, and brings the SBA's equity-injection and guarantee rules with it. A remaining partner who can raise $96,000 and whose departing partner is willing to carry a note usually comes out ahead on total cost; one who cannot raise that much, or whose departing partner wants to be fully cashed out, is choosing the SBA route's cost as the price of a smaller check today. Neither figure includes the departing partner's own tax on the sale, covered in taxes when you sell your partnership interest.

Choosing between them

The departing partner's preference matters as much as the remaining partner's financing options: a seller note asks them to keep financial exposure to a business they no longer run, which not everyone leaving a partnership wants, while an SBA loan or bank loan cashes them out fully at closing but takes longer to arrange and comes with conditions (the 24-month active-management requirement, in particular) that a recent buyer or a partner who just joined cannot meet. How to buy out a business partner covers the whole process this step fits into, and how to value a business partner's share covers getting the price right before financing it becomes the question.

This is general information about SBA policy and federal tax rules as of October 2026, not lending or tax advice. SOP revisions happen; a lender should confirm the current rules before relying on any figure here, and a tax advisor should confirm how the AFR applies to a specific note.