A partner buyout looks like the easiest deal in funeral service. The business already runs, the call volume is proven, and nothing changes in the community on Monday morning.
Banks see it differently. In our experience, buyouts draw more underwriting scrutiny than third-party acquisitions and since June 2025, the SBA rules governing them have tightened considerably.
In this guide: what changed under SOP 50 10 8, the 9:1 debt-to-worth test that decides your equity requirement, why asset purchases are now off the table, and how we structure buyouts that actually close.
Why Banks Scrutinize Partner Buyouts
In an acquisition, a lender is financing the purchase of an operating business with its own cash flow. In a buyout, no new revenue enters the picture. Debt goes up. Revenue stays flat.
That single asymmetry drives everything else. We have seen strong, profitable funeral homes struggle to finance a buyout simply because the post-transaction debt service consumed the cushion the lender needed to see.
Underwriters focus on four questions:
- Is the departing partner’s compensation actually coming off the books? If a 50% owner drew $180,000 and stays on as a paid consultant, the cash flow relief you modeled never arrives.
- Does the remaining owner have the operational capacity to run it alone? A licensed director leaving means either a hire or a workload problem.
- How much leverage does the business carry after closing? This is now a formal test, not a judgment call — see below.
- Is the buyout price defensible? Related-party pricing gets extra attention because there is no arm’s-length market check.
Understanding how banks evaluate the underlying business first will make the rest of this easier — our breakdown of what drives funeral home loan approval decisions covers the cash flow side in detail.
What Changed: SBA SOP 50 10 8
The SBA’s Standard Operating Procedure 50 10 8 took effect June 1, 2025, replacing SOP 50 10 7.1. It reversed several years of loosening and returned to stricter, older standards. Most online guidance on partner buyouts — including content still ranking in search results — predates this change and is now wrong.
| Requirement | Under the old SOP (50 10 7.1) | Under SOP 50 10 8 (current) |
| Minimum equity injection | Flexible, “do what you do” sourcing | 10% of total project costs, mandatory |
| Seller note standby period | 24 months | Entire SBA loan term — no principal or interest |
| Seller note share of injection | Not capped | 50% maximum of the required injection |
| Partial ownership purchases | Asset or stock purchase | Stock purchase only |
| Seller retaining any equity | No guarantee required | Personal guarantee for at least 2 years |
| Buyer acquiring partial interest | Standalone borrower | Must be a co-borrower with the operating company |
We always advise clients to confirm the current SOP version with their lender before modeling a deal. These rules moved once and can move again.
The 9:1 Debt-to-Worth Test
This is the provision that decides whether your buyout needs cash at closing, and most buyers have never heard of it.
For a complete partner buyout — one owner acquiring the entire remaining interest — the SBA permits less than a 10% equity injection only when both conditions hold:
- The remaining owner certifies they have been active in the business and held the same or a higher ownership interest for at least the preceding 24 months, and
- The business shows a debt-to-worth ratio of 9:1 or better, evidenced on both the most recent fiscal year-end balance sheet and the current quarter balance sheet.
Clear both and the SBA will finance more than 90% of the buyout price. Miss either one and the remaining owner must contribute cash equal to the lesser of: enough to bring debt-to-worth down to 9:1, or 10% of the business purchase price shown in the purchase agreement.
A worked example. A two-partner funeral home carries $640,000 in total liabilities against $95,000 in net worth — a debt-to-worth ratio of roughly 6.7:1. The remaining partner has held 50% and worked in the business for eleven years. Both tests pass, so a $1.2M buyout can proceed with minimal cash injection.
Change one variable. If the same firm had refinanced its building two years ago and now carries $980,000 in liabilities against $95,000 in net worth, debt-to-worth sits near 10.3:1. The test fails, and the buyer contributes the lesser of the gap to 9:1 or $120,000.
That is a $120,000 swing driven entirely by a balance sheet line most owners never look at. We run this calculation before a buyout price is ever agreed, because discovering it during underwriting means renegotiating a deal with someone you have worked beside for a decade.
Partial Buyouts Must Now Be Stock Purchases
If you are acquiring less than 100% of the remaining interest — buying out one of three partners, for example — SOP 50 10 8 requires the transaction be structured as a stock purchase. Asset purchase structures are explicitly no longer permitted for partial changes of ownership.
Two consequences follow:
- You inherit the entity’s history. Stock purchases carry forward existing liabilities, contracts, and compliance exposure — including pre-need trust obligations. Diligence on the entity matters far more than it would in an asset deal.
- The acquiring party becomes a co-borrower with the operating company, and any owner holding 20% or more after closing provides a full personal guarantee.
For funeral homes specifically, the pre-need exposure is the item we flag first. Underfunded or poorly documented trust accounts become your problem the moment the stock changes hands. Our guidance on how banks treat pre-need and trust income explains what lenders look for.
The Seller Note Trap
Seller financing used to be the standard bridge in funeral home buyouts. A departing partner would carry a note, payments would begin after two years, and everyone moved on.
That structure no longer counts toward the SBA equity injection. Under SOP 50 10 8, a seller note qualifies as equity only if it sits on full standby — zero principal, zero interest — for the entire life of the SBA loan, which typically means 10 years on a business-only deal. It can also cover no more than half the required injection.
Most departing partners find a decade of no payments commercially unworkable, especially when they are funding a retirement. The practical result: seller notes still have a place in buyout structures, but rarely as equity. We structure them as subordinated debt outside the injection calculation and solve the cash requirement elsewhere.
If seller financing is central to your deal, read our detailed breakdown of how banks evaluate seller notes in funeral home transactions before you agree to terms.
An Exception Worth Knowing
If you already own a funeral home and are acquiring another operating under the same six-digit NAICS code (812210 — Funeral Homes and Funeral Services) with identical ownership and a co-borrower structure, the SBA treats the transaction as a business expansion rather than a change of ownership. No minimum equity injection applies.
A September 2025 procedural notice removed the earlier requirement that the target operate in the same geographic area, which widened this path considerably for multi-location operators.
It is not a buyout structure, but for owners weighing whether to buy out a partner or acquire a second location, the financing math can favor expansion in ways that surprise people. We cover the mechanics in our guide to multi-location funeral home financing.
How We Structure Buyouts That Close
Preparation does more work here than negotiation. Buyouts that stall almost always stall for reasons visible on day one.
- Pull the balance sheet first. Run the debt-to-worth calculation before discussing price. It determines your cash requirement.
- Document the 24-month ownership history. Operating agreements, K-1s, and tax returns need to show continuous ownership at the same or higher percentage.
- Model post-closing compensation honestly. If the departing partner stays on payroll, that cost stays in the DSCR calculation.
- Confirm pre-need trust funding early. In a stock purchase, undisclosed shortfalls become yours.
- Bring the lender in before the price is set. Renegotiating a signed buyout agreement with a longtime partner is the outcome we work hardest to prevent.
Buyers preparing documentation will find our funeral home loan preparation guide and the full loan requirements checklist useful starting points.
Why Choose Us
We work directly with federally insured banks to structure funeral home partner buyouts, with no brokers and no upfront fees.
- Direct bank lending — your file is underwritten, not resold
- Over 20 years structuring funeral home transactions specifically
- Current on SOP 50 10 8 and how it changes buyout structures
- Debt-to-worth and DSCR modeling before you commit to a price
- Confidential conversations, including when a partnership is under strain
Conclusion
Partner buyouts are financeable, but the 2025 SBA changes reward preparation and punish assumptions. Run the debt-to-worth test before you set a price. Confirm your 24-month ownership history. Treat seller notes as debt, not equity. Structure the transaction as a stock purchase if you are acquiring a partial interest. Get these four right and the rest of underwriting tends to follow.
Call Matt directly at 913-343-2357 or start a confidential inquiry to model your buyout before terms are agreed.
Frequently Asked Questions
Can I finance 100% of a partner buyout with an SBA loan?
Yes, in specific circumstances. If you have been active in the business with the same or greater ownership stake for 24 months and the business carries a debt-to-worth ratio of 9:1 or better, the SBA permits financing above 90% of the buyout price. Fail either test and you contribute the lesser of the cash needed to reach 9:1 or 10% of the purchase price.
Why do banks treat buyouts as riskier than acquisitions?
Because debt increases while revenue stays flat. An acquisition adds a business with its own cash flow to service new debt. A buyout adds debt to an existing cash flow that has to absorb it alone, which compresses debt service coverage and reduces the cushion for a slow quarter.
Can my departing partner carry a note instead of me putting cash down?
Only if the note is on full standby — no principal or interest — for the entire SBA loan term, and even then it can cover no more than half of the required injection. Most retiring partners cannot accept a decade without payments, so we generally structure seller notes as subordinated debt and address the equity requirement separately.
Does my partner still have to guarantee the loan after they sell?
If they retain any ownership stake after the transaction, yes — SOP 50 10 8 requires a personal guarantee for at least two years, regardless of how small the remaining percentage is. In a complete exit with no retained equity, this does not apply.
How long does a funeral home partner buyout take to close?
Most SBA-financed buyouts run 60 to 120 days from signed agreement to funding, with underwriting typically consuming two to three weeks of that once a complete file is submitted. Incomplete documentation is the most common cause of delay. See our funeral home loan closing timeline for a stage-by-stage breakdown.
