Partner Buyout Financing in Texas: What Has to Be True Before a Lender Can Fund It

Most partner buyouts in a closely held Texas company are financeable. What stops one is usually not the price or the buyer's credit — it is a few provisions of the Texas Business Organizations Code and a clause or two in the company agreement, all of which can be read before anyone fills in a loan application. Partner buyout financing tends to fail late, in documentation, because nobody read them early. Circumstances differ from company to company, and what follows is general background rather than guidance on any particular deal.

Texas gives an LLC member no exit. Section 101.107 of the Business Organizations Code is a single sentence: "A member of a limited liability company may not withdraw or be expelled from the company." (Tex. Bus. Orgs. Code § 101.107) There is no statutory right to be bought out, no statutory price, and no statutory trigger.

What fills that space is the company agreement. Under Section 101.052, the company agreement governs relations among the members, managers and the company, and the company's other internal affairs. Where the agreement is silent, the Code fills the gap, and most applicable provisions of the Code can be waived or modified in the agreement, subject to Section 101.054.

That ordering matters to a lender because a lender is funding a transaction somebody has the power to complete. Where the company agreement sets out a buyout mechanism — a put right, a redemption trigger, an agreed valuation method — that mechanism is the deal, and its terms are what gets diligenced. Where it sets out none, the buyout exists only while every owner whose consent is required stays willing, which is a materially different thing to lend against.

If the company itself is the buyer, the payment is a distribution to a member, and it runs into a solvency test. Section 101.206(a) provides that, unless the distribution is made in compliance with Chapter 11, "a limited liability company may not make a distribution to a member of the company if, immediately after making the distribution, the company's total liabilities, other than liabilities described by Subsection (b), exceed the fair value of the company's total assets." (Tex. Bus. Orgs. Code § 101.206)

Two categories of liability are left out of that count. Subsection (b)(1) excludes "a liability related to the member's membership interest," and (b)(2) excludes a liability for which creditors' recourse is limited to specified company property, subject to subsection (c). The test is run on fair value, not book value, which is why a balance sheet pulled from accounting software is not the document that answers the question.

The section has teeth on both sides of the table. Under subsection (d), a member who receives a prohibited distribution has to return it if the member knew of the violation, and subsection (g) gives a two-year window to bring a claim. A redemption that fails the test is not a technical foot-fault; it is a payment the departing owner may have to give back.

A lender funding a buyout generally wants the ownership interest pledged. In Texas that is possible but narrower than it looks.

A membership interest is personal property under Section 101.106(a), and under 101.106(b) neither a member nor an assignee has an interest in any specific property of the company. The provision that matters most to a secured lender is 101.106(c): Sections 9.406 and 9.408 of the Business and Commerce Code do not apply to a membership interest in a Texas LLC, 101.106(c) controls where it conflicts with them, and its stated intent is to permit the enforcement, as a contract among the members, of company agreement provisions that would otherwise be ineffective under those sections.

In most secured-lending settings, 9.406 and 9.408 override contractual anti-assignment language. For a Texas LLC membership interest they do not. A transfer restriction or consent requirement in the company agreement keeps its force, so the consents a lender needs are the ones the agreement names — and the collateral is worth what those documents allow it to be worth.

The following scenario is constructed for illustration and does not describe any real company or matter.

A two-owner Texas LLC runs a services business, split 60/40. The owners agree a price of $2,400,000 for the 40% interest. The fair value of the company's total assets is $3,100,000 and its total liabilities are $1,400,000. The plan is for the company to borrow $2,400,000 and redeem the departing owner's interest for cash.

Run the Section 101.206(a) test immediately after the redemption. The borrowed cash arrives and leaves the same day, so total assets sit back near $3,100,000. Total liabilities are now $1,400,000 of existing debt plus $2,400,000 of new debt, or $3,800,000. Liabilities exceed the fair value of assets, and the distribution falls inside what 101.206(a) prohibits.

Change one variable and the picture changes. If the remaining owner borrows personally and buys the 40% interest directly, the company is not making a distribution, so 101.206 is not the operative test. What governs instead is the transfer-and-consent machinery in the company agreement — which, because of 101.106(c), a lender cannot rely on the UCC to override. The same price, the same business, the same bank, and a different set of rules, decided by who is named as the buyer.

Where the financing is SBA-guaranteed, the lender is also working from the SBA's own requirements for change-of-ownership transactions, which sit in SOP 50 10, Lender and Development Company Loan Programs. The version in force is SOP 50 10 8.1, effective 2026-10-01, issued under SBA Information Notice 5000-880695. It succeeded SOP 50 10 8, which took effect earlier in the same cycle.

The practical point is the reissue cadence rather than any single rule. A structure that a lender accepted under a prior version of the SOP is not automatically acceptable under the current one, so the version in force on the day the deal is papered is the one to work from.

Four things are worth knowing before a term sheet exists, and none of them require a lender's involvement to find out.

Whether the company agreement contains a buyout mechanism at all, and if it does, what triggers it and how it prices the interest. What the agreement says about transfers, pledges and consents, because Section 101.106(c) means those provisions hold against a secured party. What the fair value of the company's assets and liabilities actually is, since that — not book value — is the measure Section 101.206 uses. And whether the buyer is going to be the company or the remaining owners, because that single choice decides which of the rules above apply.

Three related pieces cover the ground on either side of the financing question: Redemption Agreements in LLC and Partnership Exits on how an exit gets priced and papered, Understanding Mezzanine Financing on capital that sits between senior debt and equity, and Does an LLC Need an Operating Agreement in Texas? on what the agreement is doing when nobody is reading it.

If a buyout is somewhere on the horizon, the least expensive version of this work is reading the company agreement before a number is agreed rather than after. Our transactional and business-dispute work is described under Services, and a structural conversation at that stage is a smaller undertaking than unwinding a structure later.

Disclaimer. This publication is provided by Amini & Conant, LLP for educational and informational purposes only and is not intended and should not be construed as legal advice. Should the reader seek further analysis of the subject matter or answers to specific questions about the subject matter, please contact the author at marketing@aminiconant.com. This publication is considered advertising under applicable state laws.

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