Partner Buyout

What is a partner buyout?

A partner buyout is the purchase of a departing partner's interest, either by the firm itself or by the remaining partners individually. Who buys determines the tax treatment for everyone. A firm redemption and a cross-purchase can produce the same cash result for the departing partner while leaving the remaining partners in very different tax positions. The structure should be decided before the price is agreed.

Redemption versus cross-purchase

In a redemption, the partnership pays the departing partner and their interest disappears, with payments split between return of capital, payment for their share of assets, and sometimes guaranteed payments the firm can deduct. In a cross-purchase, remaining partners buy with personal funds and get basis equal to what they paid. Redemptions are easier to fund from firm cash; cross-purchases give buyers cleaner basis. Many deals end up hybrid.

Valuation and payout terms in practice

Service firm buyouts often use a formula in the partnership agreement rather than an appraisal, typically built on capital account balance plus a multiple of the partner's collections or compensation. Payouts are usually installments over three to five years to protect cash flow, sometimes tied to collection of that partner's receivables. Interest on deferred payments, treatment of unfunded capital, and restrictive covenants all belong in the agreement, not in a negotiation after someone has already announced they are leaving.