Buying Out a Co-Founder in a Health Tech Company
Founder relationships change. One co-founder may want to step away, pursue another venture or retire, while the other wants to keep building. In a healthcare technology company, buying out a co-founder can protect the business and give the remaining owner full control, but it also raises hard questions about value, structure and how to pay for it.
This article explains how co-founder buyouts work in health tech companies, what affects the price and how financing can help. Rules vary by state and lender, and nothing here is legal, tax, valuation or accounting advice. Both sides should work with their own attorneys and accountants.
Why Founder Buyouts Happen
Co-founder separations happen for many reasons:
- Different visions for growth, product or a potential sale
- One founder wanting to step back for personal or health reasons
- Unequal contributions over time
- Retirement or a new career opportunity
- Disputes that make continued partnership difficult
However the decision arises, a clean separation can help the company move forward without lingering uncertainty about ownership.
Start With Your Governing Documents
Before negotiating, review the operating agreement, shareholder agreement or buy-sell agreement. These documents may set out:
- How a departing founder’s interest is valued
- Who has the right or obligation to buy it
- Payment terms and timelines
- Vesting schedules for founder equity
- Non-compete, non-solicitation and confidentiality obligations
If no agreement exists, or if the terms are unclear, the parties will need to negotiate from scratch. Counsel can help interpret existing documents and draft new ones. The enforceability of restrictive covenants varies by state.
Valuing the Departing Founder’s Stake
Valuation is often the hardest part of buying out a co-founder. Health tech companies may be valued on revenue, earnings or a combination, depending on profitability and growth. A profitable billing or services company may be valued on earnings, while a growing software company may be valued with more emphasis on recurring revenue.
Other questions include whether a minority stake should be discounted, how capitalized development costs affect earnings and whether the departing founder’s exit will itself affect value. For context, see our article on health IT valuation multiples. An independent valuation can reduce disagreement, and our advisory and consulting services can help owners think through valuation and transition planning.
Protecting the Business During the Transition
In health tech companies, a departing founder may hold critical knowledge: product architecture, client relationships, payer or regulatory experience or key vendor contacts. The buyout agreement should address:
- Transfer of knowledge, documentation and credentials
- Assignment of any intellectual property the founder created
- Introductions to key clients and partners
- Access to systems and data after departure
- A defined transition period, if the founder is staying temporarily
Client contracts, business associate agreements and licenses should not be assumed to be unaffected; counsel should review whether a change in ownership triggers any notice or consent requirements.
Ways to Structure the Buyout
Approaches to paying for a co-founder’s interest vary, and the right one depends on the company’s cash position, the founders’ goals and what lenders will support. Options may include:
- Personal purchase: the remaining founder buys the interest directly
- Company redemption: the company buys back the shares
- Installment payments: the departing founder is paid over time, where agreed
- Third-party financing: a loan funds all or part of the purchase price
- New investor: an outside party purchases some or all of the stake
Each approach has different tax, legal and cash flow consequences. If the departing founder is paid over time, lenders may limit those payments, and seller notes are typically subordinate to senior debt.
Financing Options for Buying Out a Co-Founder
Lenders can finance partner buyouts based on the company’s cash flow and the remaining owner’s experience. Depending on the situation, options may include:
- SBA 7(a) loans, which can be used for certain changes of ownership, including partner buyouts, subject to program rules and lender approval
- Conventional loans underwritten on the company’s earnings and the owner’s financial strength
SBA eligibility and terms depend on the business, the buyer, the use of proceeds, program rules and lender review. Every loan is subject to approval, and nothing here is a commitment to lend. You can estimate potential payments with our SBA loan calculator. Estimates are for planning only and do not represent an offer or approval.
What Lenders Look For
Lenders typically review historical financials, recurring revenue and retention, the remaining founder’s role and experience, the company’s ability to operate without the departing founder and the overall debt the business will carry. A clear transition plan can make a meaningful difference.
Because health tech companies are asset-light, lenders focus on cash flow rather than collateral. Companies that have relied on venture-style funding should also understand how debt compares with other options; our overview of healthcare SaaS financing explains the trade-offs.
Mistakes to Avoid
- Negotiating without reviewing existing governing documents
- Agreeing on a price the company’s cash flow cannot support
- Overlooking intellectual property assignment
- Leaving the departing founder with ongoing system access
- Failing to plan for client and staff communication
Final Thoughts
Buying out a co-founder can give a health tech company a clear path forward, but it requires careful attention to valuation, legal documents, knowledge transfer and financing. With the right structure, the remaining owner can complete the buyout while preserving the cash the company needs to keep growing.
US Medical Funding helps healthcare technology owners finance partner and co-founder buyouts. Learn more about our healthcare technology acquisition financing.
