diff --git a/bin/bitbake-setup b/bin/bitbake-setup
index 34260139c..d214ad568 100755
--- a/bin/bitbake-setup
+++ b/bin/bitbake-setup
@@ -354,6 +354,10 @@ def setup_bitbake_build(bitbake_config, layerdir, setupdir, thisdir, update_bb_c
     if template and not os.path.exists(oesetupbuild):
         raise Exception("Cannot complete setting up a bitbake build directory from OpenEmbedded template '{}' as oe-setup-build was not found in any layers; please use oe-init-build-env manually.".format(template))
 
+    oeinitbuildenvdir = os.path.join(layerdir, 'oe-init-build-env-dir')
+    if not template and not os.path.exists(os.path.join(oeinitbuildenvdir, "oe-init-build-env")):
+        raise Exception("Could not find oe-init-build-env in any of the layers; please use another mechanism to initialize the bitbake environment")
+
     bitbake_confdir = os.path.join(bitbake_builddir, 'conf')
     backup_bitbake_confdir = add_unique_timestamp_to_path(os.path.join(bitbake_builddir, 'conf-backup'))
     upstream_bitbake_confdir = add_unique_timestamp_to_path(os.path.join(bitbake_builddir, 'conf-upstream'))
@@ -368,10 +372,6 @@ def setup_bitbake_build(bitbake_config, layerdir, setupdir, thisdir, update_bb_c
     if template:
         bb.process.run([oesetupbuild, "setup", "-c", template, "-b", bitbake_builddir, "--no-shell"])
     else:
-        oeinitbuildenvdir = os.path.join(layerdir, 'oe-init-build-env-dir')
-        if not os.path.exists(os.path.join(oeinitbuildenvdir, "oe-init-build-env")):
-            logger.error("Could not find oe-init-build-env in any of the layers; please use another mechanism to initialize the bitbake environment")
-            return
         _make_init_build_env(bitbake_builddir, os.path.realpath(oeinitbuildenvdir))
 
     _prepend_passthrough_to_init_build_env(bitbake_builddir)
diff --git a/lib/bb/tests/setup.py b/lib/bb/tests/setup.py
index 53a07ee3a..33ceaf3ce 100644
--- a/lib/bb/tests/setup.py
+++ b/lib/bb/tests/setup.py
@@ -578,6 +578,73 @@ print("BBPATH is {{}}".format(os.environ["BBPATH"]))
         out = self.runbbsetup(["init", "--non-interactive", "-L", "test-repo", self.testrepopath, "--setup-dir-name", custom_setup_dir, "test-config-1", "gadget"])
         _check_local_sources(custom_setup_dir)
 
+    def test_update_preserves_build_conf_when_init_build_env_missing(self):
+        if 'BBPATH' in os.environ:
+            del os.environ['BBPATH']
+        os.chdir(self.tempdir)
+
+        self.runbbsetup([
+            "settings", "set", "default", "registry",
+            "'git://{};protocol=file;branch=master;rev=master'".format(
+                self.registrypath
+            ),
+        ])
+        self.add_file_to_testrepo('test-file', 'initial\n')
+        self.add_json_config_to_registry(
+            'test-config-1.conf.json', 'master', 'master'
+        )
+
+        self.runbbsetup([
+            "init",
+            "--non-interactive",
+            "test-config-1",
+            "gadget-notemplate",
+        ])
+
+        setuppath = self.get_setup_path(
+            'test-config-1', 'gadget-notemplate'
+        )
+        local_conf = os.path.join(
+            setuppath, 'build', 'conf', 'local.conf'
+        )
+
+        user_content = 'USER_SETTING = "preserve-me"\n'
+        with open(local_conf, 'w') as f:
+            f.write(user_content)
+
+        branch = 'missing-init-build-env'
+        self.git(['checkout', '-b', branch], cwd=self.testrepopath)
+
+        self.assertTrue(os.path.exists(os.path.join(
+            self.testrepopath, 'scripts', 'oe-setup-build'
+        )))
+        os.remove(os.path.join(self.testrepopath, 'oe-init-build-env'))
+        self.git(['add', '-u'], cwd=self.testrepopath)
+        self.git(
+            ['commit', '-m', 'Remove oe-init-build-env'],
+            cwd=self.testrepopath,
+        )
+
+        self.add_json_config_to_registry(
+            'test-config-1.conf.json', branch, branch
+        )
+
+        os.environ['BBPATH'] = os.path.join(setuppath, 'build')
+        try:
+            with self.assertRaisesRegex(
+                bb.process.ExecutionError,
+                "Could not find oe-init-build-env",
+            ):
+                self.runbbsetup([
+                    "update",
+                    "--update-bb-conf=yes",
+                ])
+        finally:
+            del os.environ['BBPATH']
+
+        with open(local_conf) as f:
+            self.assertEqual(f.read(), user_content)
+
     def test_vscode(self):
         if 'BBPATH' in os.environ:
             del os.environ['BBPATH']