70/30 Partnership Agreement: Majority-Minority Structures, Voting, and Buyout Math

The 70/30 Pattern: Who Uses It

Three common situations produce a 70/30 split. First, a founder bringing in a working partner. The founder built the business solo for years, has a track record, and is taking on a senior operator. 70% recognises the founder’s build, 30% gives the operator real upside. Second, a much larger capital cheque on one side. The 70% partner is putting in $700K, the 30% partner is putting in $300K, and they are roughly equal on time commitment. Third, a senior and junior in a professional services firm. The senior partner has the book of business and brand; the junior is building toward parity over years.

The 70/30 is also the natural answer when 50/50 is too risky (deadlock) and 60/40 over-shares control. The 70% partner truly runs the business; the 30% partner is a real partner with real protections but is not a co-CEO.

Voting Math: Why the Supermajority Threshold Matters

A 70% partner clears every standard supermajority threshold except 75% and above. The drafting choice of supermajority threshold completely determines whether the 30% partner has any veto on major decisions.

Standard practice for a 70/30 partnership is three tiers: simple majority for ordinary course, 75% supermajority for major operational decisions (annual budget, capital expenditures over $X, new lines of business, hiring senior leadership), and unanimous consent for reserved matters (amendment of the agreement, sale, dissolution, new partner admission, tax classification, related-party transactions). The 75% tier is the meaningful protection. Without it, the 30% partner is along for the ride on everything that is not in the unanimous list.

Sample 70/30 Voting and Buyout Clauses

Buyout Math: Three Common Formulas

The buyout price formula is one of the highest-stakes provisions in a 70/30 agreement. The 30% partner’s realisation event is almost certainly a buyout under the put or call mechanism rather than a sale of the whole partnership to a third party. Three formulas dominate the market.

1. Fair market value via independent appraisal. The two partners jointly select a business appraiser, or each appoints one and the two select a third (the “baseball arbitration” variant requires the appraisers to choose between the two partners’ figures, sharpening incentives toward reasonable submissions). Pros: market-rate result. Cons: appraisal fees of $20,000-$75,000, slow, the result can be far from either partner’s expectation.

2. Multiple of trailing twelve-month EBITDA. The agreement specifies a multiple (e.g. 4x for a service business, 6x for a SaaS business, 3x for a brick-and-mortar retail business) and a definition of EBITDA (which line items are added back, how owner compensation is normalised). Pros: predictable, no appraisal fee. Cons: the multiple can drift away from market value over time and create big windfalls or shortfalls.

3. Capital account plus a defined return. The 30% partner receives the balance of their capital account plus, say, 8% compounded annually since contribution. Pros: most predictable. Cons: it does not capture goodwill or appreciation, so it dramatically underpays a partner in a successful business and overpays a partner in a failing one.

A hybrid is common: fair market value as the primary, with a floor at capital plus 8% and a ceiling at 6x EBITDA. This anchors the price in market reality while protecting both partners from extreme outcomes.

Worked example

A 70/30 partnership in year 4 has TTM EBITDA of $400,000 and Partner B has a capital account of $250,000. Partner A triggers the call right.

• FMV per appraisal: $1,800,000 enterprise value. 30% = $540,000.
• EBITDA multiple at 5x: $400K x 5 = $2,000,000. 30% = $600,000.
• Capital plus 8%: $250K x 1.08^4 = $340,122.
• Hybrid (FMV floored at capital plus 8%, ceiled at 5x EBITDA): $540,000 (within band).

Partner B receives $540,000. Under the 30/70 cash-plus-note terms, that is $162,000 at closing and a 5-year note for $378,000 at AFR + 200bps. At a 6% note rate, monthly payments are roughly $7,300.

Tax Treatment of the Buyout

The tax treatment of a partner buyout depends on whether the partnership redeems the interest (an IRC §736 redemption) or the remaining partner buys it directly (a §741 sale). The economic outcome to the exiting partner is similar; the tax characterisation differs in ways that can matter for both sides.

Under §736, the redemption is split into two parts. Payments for the partner’s share of partnership property (other than goodwill in a service partnership) under §736(b) are treated as a sale and produce capital gain. Payments under §736(a) for unrealised receivables or goodwill in a service partnership are ordinary income to the exiting partner and deductible by the partnership. Allocating between the two requires careful drafting and the partnership’s consent.

Under §741, the remaining partner buys the interest from the exiting partner directly. The exiting partner has capital gain on the sale (with ordinary-income recharacterisation for any “hot assets” under §751: inventory, unrealised receivables, depreciation recapture). The remaining partner takes the outside basis in the acquired interest equal to the price paid; with a §754 election, they get a step-up in inside basis as well.

For the partnership in our worked example with $200,000 of unrealised receivables on the books, the §751 hot-asset rules would recharacterise $60,000 of Partner B’s $540,000 buyout as ordinary income (30% of $200K). Partner B pays ordinary tax on $60K and capital gain tax on $480K minus their basis. A CPA should always model the alternatives before the buyout closes.

The Bad-Leaver Provision

A 70/30 partnership that wants to discount the 30% partner’s exit price for cause needs a bad-leaver clause. The clause defines “bad-leaver” events (typically termination for cause, breach of non-compete or confidentiality, fraud, or material breach of the partnership agreement) and reduces the buyout price to a defined floor (commonly capital contributed without any return, or 50% of fair market value).

Courts generally enforce bad-leaver provisions if the discount is reasonable and the trigger events are clearly defined. Penalty-style provisions (e.g. forfeiture without compensation for any breach) are routinely struck down as unenforceable penalty clauses. The drafting needs to be a genuine liquidated-damages framework, not a punishment.

Authoritative Sources

• RUPA §401 (partner default rights). Uniform Law Commission.
• IRC §704(b) (substantial economic effect of allocations).
• IRC §736 (redemption of a partner’s interest). Cornell LII.
• IRC §741 (sale of a partnership interest). Cornell LII.
• IRC §751 (hot assets / unrealised receivables and inventory). Cornell LII.
• IRC §754 (election to adjust basis of partnership property).
• IRS Publication 541, Partnerships. IRS.

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