Partner buyout

Definition

Buying out a partner's stake so one owner ends up holding it all.

Why It Matters

The rules do not waive an injection here so much as set a gate on financing more than 90% of the price. Two tests, and both have to pass. The remaining owner certifies they have been actively participating and have held the same or an increasing stake for at least the past 24 months. The balance sheet for the last full year and the current quarter has to show debt-to-worth no worse than 9 to 1 before the change. What happens when a test fails is the part worth knowing, because it is not a flat 10 percent. The owner contributes cash either sufficient to bring debt-to-worth to 9 to 1, or 10 percent of the purchase price, WHICHEVER IS LESS. So a buyout that misses the certification can still close on far less cash than a normal acquisition, and the certified financials that decide it are the gating homework.

In numbers: Two 50/50 partners agree on a $1.2M buyout of one side. Both tests pass, so the lender finances more than 90% and the buyer's cash to close is closing costs rather than $120k of equity. Had the certification failed, the contribution would have been whichever is less of $120k and the cash it takes to reach 9-to-1.