Buying a business with a partner: roles, equity and the agreement
Short answer
Buying a business with a partner works when you agree, in writing and before the LOI, who runs what, who puts in how much money, how equity and pay are split, how decisions are made, and how either of you can exit. Put it in an operating agreement with a buy-sell clause.
If you use an SBA loan, every owner of 20% or more generally has to personally guarantee it, so both partners carry the risk regardless of who manages day to day.
Two buyers can afford a bigger business, cover more skills and share the load. They can also end up in the worst kind of dispute: two owners, one business, no way out. The difference is almost always what was written down before the deal.
Agree these before the LOI
| Question | Why it matters |
|---|---|
| Who works in the business, and in what role? | Lenders ask; staff need one boss for each area |
| How much cash does each put in? | Sets equity; affects the SBA equity injection |
| How is pay separate from profit? | The working partner gets a salary; profits split by ownership |
| Which decisions need both partners? | Hiring senior staff, borrowing, selling, big spending |
| What happens in a deadlock? | A tie-breaker, mediator, or buy-sell trigger |
| How can either partner exit? | Buy-sell terms, valuation method, payment terms |
Worked example: what a 50/50 deadlock looks like
Illustrative example
Two equal partners disagree about hiring a general manager. One wants to hire and step back; the other wants to keep running it themselves and save the salary. With 50/50 voting and no tie-breaker, nothing happens, and the business drifts. A simple fix written in advance: certain decisions go to a named outside adviser if partners deadlock, or a deadlock that lasts 90 days triggers a buy-sell process where one partner can name a price and the other chooses to buy or sell at it. Neither is pleasant, but both beat a business with two owners and no decisions.
SBA points for partners
- Owners of 20% or more generally must personally guarantee the loan. See personal guarantees.
- The lender will want to know who manages day to day and their experience.
- A partner who invests but holds under 20% with no control may be treated as a non-controlling minority investor, whose money counts as a limited equity source and whose distributions are restricted while the loan is outstanding if their investment is part of the required injection.
Common partner structures
| Structure | How it works | Main risk |
|---|---|---|
| Two operators, 50/50 | Both work full time, split equity and decisions | Deadlock; overlapping roles |
| Operator + investor | One runs it on a salary; the other contributes cash | Disputes over pay, distributions and control |
| Majority + minority operator | Lead buyer controls; a key manager owns a stake | Minority rights and exit terms |
| Family partnership | Relatives buy together | Business disagreements become family ones |
Write the operating agreement first
Your attorney should draft the operating agreement for your buying entity before closing, covering management, voting, distributions, capital calls, transfer restrictions and buy-sell terms. If you're the one buying out a partner later, see how to buy out a business partner.
Worked example: separate pay from profit
Illustrative example, not advice on how to split equity
Two partners buy a business with $400,000 of SDE. Partner A works in it full time; Partner B keeps his job and contributes cash. They each put in $100,000 and split equity 50/50. If they "split the profits", A works full time for the same return as B, which usually ends badly. Instead, the business pays A a market salary for the role, say $110,000, which is an expense. What's left after salary, debt service and reserves is profit, split 50/50. If debt service is $150,000 and reserves $20,000, profit is $400,000 − $110,000 − $150,000 − $20,000 = $120,000, or $60,000 each. A earns $170,000 for the job plus ownership; B earns $60,000 on his investment. Both can see why. Write this into the operating agreement before you close.
Questions partners should answer together
- What happens if the business needs more cash and only one of us can provide it?
- If one of us wants to leave in five years, how is the price set and paid?
- What is each of us responsible for, and how will we judge it?
- How do we decide when we disagree?
- Will we both guarantee the loan, and how do we share that risk?
- What will we tell staff, customers and lenders about who's in charge?
Red flags in partner deals
- No written agreement until after closing.
- Equity split by friendship, not contribution.
- One partner unwilling to guarantee when the lender requires it.
- No deadlock mechanism for a 50/50 split.
- Different time horizons: one wants to sell in five years, the other never.
Checklist for the partners' agreement
- Capital contributions, and what happens if more cash is needed later (capital calls, dilution).
- Roles and titles; who has authority to sign, hire, borrow and spend above a set amount.
- Salaries for working partners, reviewed annually; distributions policy for profit.
- Decisions that need both (or a set majority of) partners.
- Deadlock resolution: mediation, a tie-breaking adviser, or a buy-sell trigger.
- Buy-sell terms for death, disability, departure, divorce and breach; price method and payment terms.
- Non-compete and confidentiality between partners.
- Who guarantees which debts, and how guarantee risk is shared or compensated.
Each partner should have their own attorney review it. Not legal advice.
Guarantees and collateral: who is on the hook
On an SBA loan, every owner of 20% or more must give a personal guarantee, and lenders may take personal real estate as collateral when the loan isn't fully secured. Partners often agree the ownership split without talking about what that means for each person's house and savings. Settle these before you apply:
- Who guarantees, and whether a partner below 20% will be asked to guarantee anyway.
- Whose real estate is pledged, and how the partner who pledges more is compensated, for example with a guarantee fee or a larger share of profits.
- What happens to the guarantee if a partner leaves. Lenders rarely release a guarantor just because the partners agree; the departing partner may stay liable until the loan is refinanced or repaid.
- Whether partners will indemnify each other if one guarantor ends up paying more than their share.
Fund the buy-sell, or it may not work
A buy-sell agreement that requires the survivors to buy a partner's share after death or disability only helps if there is money to pay for it. Many partners fund it with life and disability insurance, owned either by each other or by the company. Ask an insurance adviser and your attorney how the policies should be owned, since it affects taxes and who receives the money, and review the amounts as the business grows.
Decide, too, how partners will be paid while the business repays its loan. Lenders limit distributions in many loan agreements, and a partner who works in the business full time and one who doesn't will have different expectations. Write down salaries, distributions and how they change if profits fall.
Frequently asked questions
Do both partners have to guarantee an SBA loan?
Owners of 20% or more generally must provide personal guarantees under SBA rules. Your lender will confirm the requirement for your structure.
How should equity be split between partners?
Separate money from work. Equity can reflect capital contributed, while salaries pay for work done. Mixing them is the most common source of partner resentment.
What is a buy-sell agreement?
Provisions, often in the operating agreement, that say what happens if a partner dies, becomes disabled, wants out or is pushed out: who can buy their share, at what price or valuation method, and how it's paid.
Can one partner be passive?
Yes, but lenders want to know who manages the business daily. A passive partner with a small stake may be treated as an investor; under SBA rules, non-controlling minority investors under 20% have their own restrictions.
How do partners usually split equity when one works in the business?
There's no standard split. Many partnerships separate the two questions: the working partner is paid a market salary for the job, and equity follows the cash and risk each partner contributes, sometimes with extra equity for the working partner that vests over time. Write it down with your attorney before the LOI.
What should a buy-sell agreement cover?
Triggers (death, disability, divorce, departure, deadlock), how the price is set (a formula, an appraisal process), how it's paid (cash, insurance proceeds, a note over time), and any restrictions on selling to outsiders. Fund death and disability buyouts with insurance where possible.
Sources
- SBA SOP 50 10 8.1 (personal guaranties; minority investor rules in Appendix 15)
- IRS: Business structures
- Cornell LII: Buy-sell agreement
- Cornell LII: Limited liability company
- IRS: About Form 1065 (partnership return)
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.