How to Buy Out a 50/50 Business Partner or Majority Founder in Texas Using an SBA 7(a) Loan: SOP 50 10 8 Equity Rules, 24-Month Standby Notes, and DSCR Math
1. Why SBA SOP 50 10 8 Changed the Game for Texas Partner Buyouts & Key-Employee MBOs
For decades, Texas owners who wanted to sell to their General Manager—or buy out a 50/50 partner or sibling after a deadlock—hit the same wall: conventional Texas commercial banks cap leverage at `2.0x–2.5x EBITDA` over 5 years and demand `20%–25%` personal cash down, forcing the retiring founder to carry 80% of the price on a risky 10-year seller note. Modernized `SBA SOP 50 10 8` change-of-ownership rules solved both problems (see our Employee Buyout hub, MBO Financing Structures guide, and Verified Fact Sheet):
The 9:1 Debt-to-Worth Rule for 100% Partner Buyouts
When an existing co-owner (for example, a 50/50 partner, a 25% junior partner, or an active sibling in a second-generation buyout) buys out a departing partner, SBA 7(a) allows 100% financing with $0 personal cash down if the buyer has held an unchanging ownership percentage and worked actively in the business for at least 24 months, and the company’s balance sheet satisfies the `≤9:1` Debt-to-Worth test (or uses a 24-month standby seller note).
Partial Buyouts & The 24-Month Standby Seller Note
Prior to recent SOP updates, SBA 7(a) required the seller to exit 100% of their ownership on Day 1. Today, partial changes of ownership are permitted—allowing a founder to sell `85%` to their GM for SBA cash while retaining a `15%` minority stake without signing an SBA Personal Guaranty (which applies at `≥20%` ownership). Even better, a 24-month full-standby seller note can satisfy most of the GM’s required `10%` equity injection.
2. Comparing the 3 SBA 7(a) Internal Buyout Structures Under SOP 50 10 8
Here is how Texas SBA Preferred Lenders (`PLP` banks) underwrite the three primary internal buyout structures for companies up to `$5.0M–$7.5M` in enterprise value:
| Buyout Structure | Who Qualifies | Required Buyer Cash Injection | Seller Note & Standby Rules | SBA Personal Guaranty Rules |
|---|---|---|---|---|
| 1. 100% Partner / Co-Owner Buyout (50/50 Deadlock or Junior Partner Buyout) |
Existing owner with ≥24 months active involvement and unchanging equity stake prior to application. | 0% new cash required if historical/pro-forma Debt-to-Worth is ≤9:1 (otherwise 10% total equity via cash or standby note). | Departing partner receives up to 100% cash at close (or 90% SBA cash + 10% 24-mo standby note if Debt-to-Worth >9:1). | Remaining partner (≥20%) signs SBA Form 148 unlimited guaranty; departing partner exiting 100% is 100% released. |
| 2. Complete Key-Employee Management Buyout (MBO) (W-2 GM or Ops Manager Buying 100%) |
W-2 General Manager, Operations Manager, or key supervisor team with proven industry/management experience. | 2.5% to 5.0% buyer cash (can come from personal savings or vested MBO bonus/phantom stock plan). | 5.0% to 7.5% Seller Note on 24-Month Full Standby (interest accrues; P&I payments resume in Month 25) + optional performing seller note above 10%. | Purchasing manager(s) owning ≥20% sign personal guaranty; retiring founder is 100% released from SBA debt. |
| 3. Staged / Partial Change of Ownership (GM Buys 81%–90% Now; Founder Keeps 10%–19%) |
Key manager buying control while founder retains a minority equity stake and license/client continuity role. | 10% equity injection on the purchased share (satisfied via buyer cash, existing retained net worth, or standby seller note). | Stock/membership purchase structure; operating company joins as co-borrower on the SBA 7(a) note. | Critical 20% Rule: If founder retains <20% equity (for 6+ mos prior if reducing), founder avoids the SBA personal guaranty! |
3. Worked $3.60M Texas Partner / Key-Manager Buyout Cash-Flow & Debt-Service Table (1.58x DSCR)
Consider a Texas commercial service contractor valued at $3,600,000 (4.5x on $800,000 Adjusted EBITDA) where the W-2 Operations Manager (already earning $145,000/yr inside the P&L) buys 100% of the company using an SBA 7(a) loan. Notice how the cash flow easily covers the debt service while putting $3,240,000 cash in the founder’s bank account on Day 1:
| Capital Tranche & Cash-Flow Line | Dollar Amount / Share | Rate & Amortization Terms | Annual Debt Service (Years 1–2 vs. Year 3+) |
|---|---|---|---|
| 1. Senior SBA 7(a) Acquisition Term Loan | $3,150,000 (87.5% of Price) | 10-year fully amortizing term at 9.25% illustrative rate (no balloon payment; 0% prepayment penalty!). | $483,960 / yr ($40,330/mo principal & interest). |
| 2. Buyer Cash Injection (From Vested MBO Bonus + Savings) | $90,000 (2.5% of Price) | Contributed as common equity at closing; wired to Seller at closing table (`$3,240,000` total Day-1 cash to Seller). | $0 debt service (pure equity). |
| 3. Seller Promissory Note on 24-Month Full Standby | $360,000 (10.0% of Price) | 7.0% interest; Months 1–24 on Full Standby ($0 paid); amortizes over 60 mos starting Month 25 (`IRC §453` installment tax deferral). | $0 / yr in Years 1–2 → ~$81,300/yr in Years 3–7. |
| 4. Verified Cash Flow Available for Debt Service | $765,000 Free Cash Flow | $800,000 Adjusted EBITDA minus $35,000 normalized maintenance capex (GM’s $145K salary is already expensed in P&L!). | +$281,040/yr Post-Debt Cushion in Years 1–2! |
| 5. SBA Underwriting Debt Service Coverage Ratio (DSCR) | 1.58x DSCR (Years 1–2) · 1.35x DSCR (Year 3+) | Exceeds the 1.15x SBA statutory floor and the 1.25x Texas Preferred Lender (`PLP`) underwriting target. | 100% Bankable + Zero Broker Commission ($360K saved)! |
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Book a 30-Minute Working Call →Texas SBA 7(a) Partner Buyout & Key-Employee MBO FAQ
Can I buy out my 50/50 business partner in Texas with 0% cash down using an SBA 7(a) loan?
Yes. Under SBA SOP 50 10 8 partner-buyout rules, an existing co-owner can finance up to 100% of the partner buyout price with zero new out-of-pocket cash injection if two conditions are met: (1) the purchasing partner has been actively involved in the business and held an unchanging ownership percentage for at least the preceding 24 months, and (2) the business balance sheet shows a pro-forma Debt-to-Worth ratio of no more than 9:1 prior to the change of ownership (or the departing partner carries a 24-month full-standby seller note to bridge the equity requirement).
How can a W-2 General Manager or key employee buy a $3M–$5M Texas business without having $300K–$500K in personal cash?
Under SBA SOP 50 10 8 change-of-ownership rules, a Seller Promissory Note placed on Full Standby (no principal or interest payments for the first 24 months of the SBA 7(a) loan, with interest accruing) can count toward the required 10% buyer equity injection—typically allowing a key manager to buy the company with just 2.5% to 5.0% in personal/vested-bonus cash combined with a 5.0% to 7.5% 24-month standby seller note and a 90% SBA 7(a) loan.
Can the retiring founder keep 10% to 15% of the company in a partial SBA 7(a) buyout without signing a personal guaranty?
Yes. Under modernized SBA SOP 50 10 8 partial change-of-ownership rules, a selling owner is no longer forced to sell 100% of their equity on Day 1. Any person who owns 20% or more of the company post-closing must sign an unlimited SBA Personal Guaranty (SBA Form 148). However, if the retiring founder retains less than 20% equity (e.g., 10% or 15% non-operating roll-over stake) and holds no officer/director control, they are generally exempt from the SBA personal guaranty (subject to the 6-month lookback rule on equity reductions).
What Debt Service Coverage Ratio (DSCR) do Texas SBA 7(a) Preferred Lenders require for a partner or employee buyout?
While the statutory SBA minimum DSCR is 1.15x, most Preferred Lenders (PLP banks) in Texas underwrite partner buyouts and management buyouts to a minimum 1.25x to 1.35x historical and projected Debt Service Coverage Ratio—calculated as tax-return EBITDA (plus verified one-time add-backs and the departing partner’s redundant compensation) divided by total annual SBA 7(a) and performing seller-note debt service.