By Terry Watts, MBA, CM&AP, CEPA
If you’re planning to buy out your business partner in the next few years, there’s an important financial consideration that many business owners overlook.
Doubling your company’s earnings could more than double the cost of buying out your partner.
That’s because business value doesn’t necessarily increase at the same rate as profitability. As a company grows, improves its operations, and attracts a broader pool of potential buyers, it may also command a higher valuation multiple.
For business partners considering a future ownership transition, understanding this relationship can make a significant difference in how they plan, negotiate, and ultimately structure the transaction.
One common approach to valuing an established business is to apply a multiple to its normalized earnings.
For larger, professionally managed businesses, those earnings are frequently measured using EBITDA, or earnings before interest, taxes, depreciation, and amortization.
However, the multiple applied to those earnings is not necessarily constant as a business grows.
Consider the following hypothetical example:
| Current Business | Future Business | |
|---|---|---|
| Annual EBITDA | $500,000 | $1,000,000 |
| Valuation multiple | 4× | 6× |
| Enterprise value | $2,000,000 | $6,000,000 |
| Illustrative value of a 50% ownership interest | $1,000,000 | $3,000,000 |
In this example, earnings doubled, but business value tripled.
The difference comes from two sources of value creation:
A larger business may attract different types of buyers, including strategic acquirers and private equity investors. It may also have stronger management, more diversified customers, better systems, and more predictable financial performance.
These characteristics can make the business more attractive and potentially support a higher valuation multiple.
Research from GF Data on completed middle-market acquisitions illustrates this size premium. Its first-half 2025 data showed that transactions in the $10 million to $25 million enterprise-value range generally commanded higher EBITDA multiples than transactions below $10 million.
However, multiple expansion is not guaranteed. Industry, company quality, buyer type, and market conditions all influence valuation.
The multiples used in the example above are illustrative, not estimates of what any particular business should sell for.
For a business owner planning to acquire their partner’s ownership interest, the implication is significant: the future purchase price may increase considerably faster than the company’s earnings.
Before discussing a buyout price, it’s important to distinguish between the value of the entire business and the value of an individual ownership interest.
The enterprise value of a company represents the value of its operating business. Determining the equity value available to its owners may require adjustments for debt, excess cash, nonoperating assets, and other financial obligations.
The value of an individual ownership interest can also be influenced by:
A 50% ownership interest is not necessarily worth exactly half of the company’s enterprise value.
In the earlier example, the ownership-interest values assume no net debt or other equity adjustments and a proportional allocation of equity value.
This is one reason a professional business valuation can be especially useful when planning a partner buyout.
It gives the parties a more informed starting point for their discussion.
Business partners don’t necessarily need to agree on a purchase price years before a transaction takes place.
However, they should consider establishing how that price will eventually be determined.
There are several approaches.
The partners can negotiate a future purchase price in advance.
This provides a degree of certainty for both parties and allows the purchasing owner to plan for the eventual financial commitment.
However, it also introduces risk. If the company grows substantially, the selling owner may receive less than the future market value of their interest. Conversely, if performance declines, the purchasing owner may be obligated to pay more than the interest is worth at that time.
A predetermined price may be appropriate in certain situations, particularly when other transaction terms help balance the interests of both owners.
Partners may agree on a methodology for calculating the purchase price in the future.
For example, an agreement might reference normalized EBITDA, an agreed-upon multiple, and specified adjustments for debt and cash.
The advantage of a formula is that it allows the purchase price to respond to changes in business performance.
However, the formula must be carefully designed. A fixed multiple may become inappropriate if the business changes substantially, and disagreements can arise over how earnings should be calculated or normalized.
Another option is to agree that a qualified valuation professional will determine the value of the business or ownership interest when the transaction occurs.
This approach can better reflect the company’s financial performance, business characteristics, and market conditions at that time.
The trade-off is that neither party knows the future purchase price with certainty.
Partners should also establish how the valuation professional will be selected, what type of value will be determined, and how disagreements will be resolved.
The financial success of a partner buyout depends on more than the purchase price.
How the transaction is structured can be equally important.
For example, a buyout could involve:
Each approach creates different considerations regarding risk, cash flow, control, and the timing of payments.
An important question is whether the business can support the transaction without compromising its financial stability or ability to continue growing.
A buyout that places excessive financial pressure on the company may create problems for both the remaining owner and the departing partner.
Many of the financial and due diligence considerations involved in buying a business also apply when acquiring a partner’s ownership interest.
Partners should also consider whether the selling owner will continue working in the business after the transaction.
Selling ownership does not necessarily mean retiring or ending an employment relationship.
A former owner may continue contributing as an employee, executive, consultant, or advisor.
If that is part of the plan, responsibilities, compensation, performance expectations, and the duration of the arrangement should be addressed separately from the purchase of the ownership interest.
Business owners should work with their attorneys, CPAs, lenders, and other appropriate advisors to evaluate the legal, tax, and financing implications of their proposed structure.
Years ago, I acquired a business where the existing manager had been interested in becoming an owner.
I told her that when she was ready, she would have the opportunity to purchase an ownership interest in the business.
A few years later, she acquired 50% of the company from me.
As part of that transaction, we also established how she would eventually acquire my remaining ownership interest.
Having those discussions early allowed us to create a path toward a future ownership transition rather than waiting until one of us was ready to leave the business.
That experience reinforced something I believe is important for business partners:
The best time to work out how a partnership will end is while it’s still working.
When both owners have time, flexibility, and a productive working relationship, they are often in a much better position to discuss their respective goals and establish an arrangement that works for both parties.
The objective should not be for one partner to benefit at the expense of the other.
It should be to create a fair and financially sustainable path toward the ownership transition.
If you anticipate buying out a business partner in the future, consider beginning with these five steps:
You may not be ready to complete a transaction today.
But understanding the value of the business, the options available to both partners, and the financial implications of waiting can help you make better ownership decisions now.
Murphy Business Sales helps business owners understand business value, evaluate acquisition opportunities, and navigate business ownership transitions.
Whether you are beginning to explore a future partner buyout or actively considering a transaction, establishing a clear understanding of the business’s value is an important starting point.
Our team can help you evaluate which type of valuation is appropriate for your situation and identify considerations that may affect the transaction.
Contact Murphy Business Sales to schedule a confidential discussion about your business, its value, and your ownership-transition objectives.
Call (916) 905-4997 or request a confidential consultation online.
About the Author
Terry Watts, MBA, CM&AP, CEPA, is an entrepreneur, business owner, and business intermediary with Murphy Business Sales. His experience includes acquiring, operating, growing, and selling businesses, as well as helping business owners understand business value and navigate ownership transitions.
California DRE License #02191771.
Murphy Business Sales franchises are independently owned and operated.
This article is intended for general educational purposes and does not constitute legal, tax, or investment advice. Actual business valuations and transaction structures depend on the specific circumstances of the business and its owners.