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Business Partner Buy-Out Finance
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Getting a loan to buy your Business partner out
Written by
Shaun McGowanBuying out a business partner can be a simple and inexpensive process if both partners are amicable, or a complex and expensive process if one partner disputes the buyout arrangement.
As the value of the departing partner’s shares will vary between buyout situations, business owners will often seek business finance to ensure they can cover the cost of the purchase and avoid legal proceedings.
Key Features
- Borrow from $5,000 to $500,000
- Fixed or variable interest rates
- Repayments to suit your budget
- Terms from one month to five years
- Secured & unsecured options
Who is eligible?
- Own a business and have an ABN
- Business is GST-registered
- Permanent Citizenship or Residency
- Minimum business-operating time of six months
- Can provide business bank statements
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What is a Business partner buyout?
A business buyout refers to the process of buying or selling shares owned by a partner or shareholder of a business. Most shareholder or partner agreements will disclose the mechanics of how a buy out should work and also how the business is to be valued in the event of a buyout.
Business partner buyouts may happen for various reasons. Most commonly, buyouts occur when one business partner is retiring or looking to start a new business or in disputes.
Partner buyouts may also happen when:
- The business’s partnership agreement expires
- A partner can no longer legally own the business
- A partner declares bankruptcy
- A partner passes away
- The business applies for bankruptcy or insolvency
- Majority shareholders want to remove minority shareholders from the business
These situations can be amicable or hostile, and understanding the process around a partner buyout can limit the financial strain and personal stress while the partnership is dissolved.
Having the buyout structure included in the shareholder agreement (SHA) will limit the emotion that can come in the event of a disputed buyout.
How to finance a partner buyout
The first consideration before initiating the buyout process is to consider how to finance the purchase of shares. It’s unlikely that one partner will have the funds on hand to complete the buyout, and they will often need to apply for business finance as a result.
There are two common ways to fund a business partner buyout:
- First-mortgage secured loans
- Cash flow secured loans
Find the best rate on a partner buyout loan
FIND YOUR RATEFirst mortgage secured loans
First-mortgage secured loans use existing property as security. If you are looking to buy out your business partner and own a home, there are plenty of lenders who will offer fast approval on business finance.
Cash flow secured loans
If you don’t own property, you can still apply for finance based on the current and projected performance of the business. Cash flow lending uses the profits of a business to determine eligibility for finance, and therefore may not be an option for new businesses without established trading history.
Payment Plans
If the dissolving of the partnership is amicable, you may be able to work out a payment plan with the departing partner. This arrangement will often work similar to a private loan, where the remaining partner will pay for the departing partner’s shares over time, along with an agreed amount of interest.
Alternatively, an agreement may be reached where the partner exiting the business stays on as an employee for an agreed period of time, with conditional lump-sum payments made periodically until the buyout of the shares is completed.
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Buying out your Business partner
Once you have determined your eligibility for finance, the next step is to consult your partnership agreement. This should provide direction for the business and how it will operate, and also contain a buyout clause, which sets out the process for buying and selling shares within the business.
Ideally, your buyout clause should detail:
- When a partner can sell their shares in the business
- Who is eligible to purchase a partner’s shares
- The valuation process for determining the sale price of shares
The buyout clause may also specify options for buying out the departing partner, including:
- Full buyout - Where a partner is exiting the business and all shares will be sold to the remaining partner
- Part buyout - Where one partner sells a number of shares to another partner to allow majority control of the business
Including details about the buyout process in your partnership agreement will ensure that, regardless of how the partnership ends, both the departing and remaining partners will be protected and a fair price for shares can be mutually agreed upon.
Find the best rate on a partner buyout loan
FIND YOUR RATEComplications with valuing shares
In a best-case scenario, both the remaining and departing partner will be on amicable terms, and able to easily reach a buyout arrangement without conflict.
When a business relationship turns hostile, however, there are likely to be disputes around the buyout process, such as:
- The value of the shares held by the departing shareholder
- The value of contributions to the business by the departing shareholder, and how these affect the total value of the business
When a departing partner leaves a business relationship, they will often try to maximise the value of their shares, just as the remaining partner will try to devalue the shares to reduce the buyout price.
Where business partners cannot mutually reach an agreement on the process:
- The partners may choose to engage in business mediation to find a solution
- If mediation is successful, it will set out terms for the buyout and valuation of shares
- If mediation is unsuccessful, partners may engage individual legal teams and present their respective cases for a fair buyout process before a court.
Ultimately, it is in everyone’s best interests to avoid mediation and legal action where possible, as the process can be incredibly time-consuming, stressful, and expensive for both partners.
How to value a Business for partner buyout
An important part of buying out a business partner is to value your business and determine a fair price for the sale and purchase of shares. To do this, you can engage an independent valuation firm and valuation consultant, who will conduct an impartial valuation of the business based on its current and projected future profits.
The valuation consultant will look at the existing debt and equity within the business, and consider several independent factors which may affect the value, such as:
- The departing partner’s expertise
- The departing partner’s business contacts and influence
- Unpaid salaries
- Unpaid dividends
- Existing shareholder loans
If the departing shareholder contributes significant industry expertise to the business, or profits within the business are generated through the departing shareholder’s contacts and influence, this may affect the sale price of the shares.
In this situation, you may choose to consider two options:
- Agree to include these factors in the valuation and specify a non-compete clause (NCC) to prevent the departing shareholder from opening a competing business.
- Agree to exclude these factors and purchase the shares at a reduced price, without restricting the departing shareholder from opening and operating a competing business.
Non-compete clauses will often be included within your partnership agreement, as will the specifics about how company shares are valued.
Without a partnership agreement, both parties (the remaining partner and the departing partner) will need to come to a mutual agreement on the process to avoid complications and prevent legal mediation.
FINALISING YOUR BUYOUT AND RESOLVING ISSUES
Forced buyouts
A forced buyout often occurs when minority shareholders are preventing majority shareholders from finalising business decisions. Forced buyouts may be included in the partnership agreement as a buy-sell arrangement, which allows:
- Majority shareholders to force the sale of shares from minority shareholders
- Minority shareholders to exit the company and force the purchase of shares
As with other buyout arrangements, a forced buyout clause should stipulate the process for buying and selling shares, the valuation process for shares, and conditions for who is eligible to purchase shares from a minority shareholder.
After your buyout
Once an agreement has been made on the purchase price for the partner buyout, you will need to complete the purchase and update your business documents. This includes:
- Submitting updated business documents to federal, state, and local authorities
- Transferring all business-related accounts
- Removing the former partner's name from business accounts
You may also consider reviewing the partnership agreement - if there will be two or more remaining partners - and update the terms for any future buyout arrangements.
Buyout without a partnership agreement
If you do not have an established partnership agreement, the state or territory legislation relative to your business location will determine how your partnership will be dissolved. You will also need to consult your local business authority to ensure the process meets all legal requirements for the state your business operates in.
Refer to the individual state Partnership Acts below, and contact your state's government business authority for more information.
Australia State Partnership Acts and Business Authorities
| State Partnership Acts | State Business Authorities |
|---|---|
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Here are the most popular questions people are asking about business partner buyouts:
Where can I get finance for a business partner buyout?
You can finance a business partner buyout with both unsecured and secured business loan options. Unsecured finance will be assessed on the strength of your business, while secured finance will use a property as collateral.
How do I value a business for a buyout?
Buyout valuations may be dictated in the partnership agreement, either specifying a value of the shares or the process for valuation. Generally, an independent valuation consultant will assess the value of the business and determine the sale price of shares.
What are a partnership agreement and buyout clause?
A partnership agreement is a legal document created by co-partners of a business. It details how the business will operate and how decisions within the business will be made. A buyout clause is a section within a partnership agreement that stipulates the process for a departing shareholder and the sale of their shares.
What is a forced buyout clause?
A forced buyout clause is a condition within a partnership agreement that allows majority shareholders to force the sale of shares held by minority shareholders. The clause can also allow minority shareholders to exit the business and force majority shareholders to purchase their shares.
About the Author
Shaun
McGowan
Shaun McGowan
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.
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