Business Partner Buy-Out Finance
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Getting a loan to buy your business partner out
Buying 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 much of their own finance may be tied up in their share of the business, owners will often seek business finance to cover the cost of the purchase. The options available and the process are generally quite similar to getting finance to buy a separate business. Let's take a look.
How to finance a partner buyout
Before initiating the buyout process, it's important to understand how you will finance the purchase.
There are two common ways to fund a business partner buyout:
- Secured business loan
- Unsecured business loan
Plus a handful of alternative options we'll discuss below.
Secured business loans
To apply for a secured business loan, you’ll need an asset to use as collateral. This could be a personal asset, such as your own home, or a business asset.
Secured business finance has a number of benefits, including lower interest rates than secured loans. However, there is a degree of risk as you could lose the asset if you cannot repay the loan.
Unsecured business loans
You could also use an unsecured business loan to finance the buyout. You won’t need an asset to secure the loan and the funds can be used with fewer restrictions compared to secured finance.
Instead of an asset, an unsecured business loan is assessed and granted based on business revenue. In other words, you'll need to be able to demonstrate to the lender that the business can sustain sufficient cash flow to support the loan repayments.
Other options for financing a business purchase
Vendor finance: With vendor finance, you only pay part of the sale price up front and then pay the rest to your partner (plus interest) in instalments. Essentially your former business partner is financing part of the sale.
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.
Invoice finance: If your business is owed money by customers, you may be able to borrow against the value of the outstanding invoices to finance part of the buyout. This is called invoice finance.
How to qualify for a loan to buy out a business partner
You can apply for finance to buyout a business partner from a bank, credit union, online lender or peer-to-peer lender. The exact eligibility criteria will depend on the finance option you choose and the specific provider.
The lender will assess your eligibility based on information about you and your business.
What information will you need to provide?
The lender will ask you to demonstrate that:
- You are an Australian citizen or permanent resident
- You do not have any issues in your credit history (if you do, some lenders offer bad credit business loans)
- Your personal income, assets and liabilities demonstrate your capacity to borrow (there are low doc business loans available for borrowers who cannot provide standard documents as proof)
- The lender may also want to know how much of your own money you have invested into the business
The lender will also ask for detailed information about your business. It will want to establish that:
- Your business has been in operation for at least six months
- It has sufficient regular revenue to service the finance
- It is in a strong financial position based on its balance sheet
- Overall the outlook is good for the industry you operate in
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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 help keep emotion out of buyout, particularly if there are areas of dispute.
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.
How to value a business for partner buyout
An important part of buying out a business partner is valuing the business to determine a fair price for the sale. You can engage an independent valuation consultant to conduct an impartial valuation of the business based on its current and projected profits.
The valuation consultant will look at the existing debt and equity within the business, and consider several other factors which may affect the value, such as:
- The departing partner’s expertise, business contacts and influence
- Unpaid salaries and dividends
- Existing shareholder loans
Dealing with disputes when buying out a business partner
If a business relationship turns hostile, 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.
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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Business partner buyout finance FAQ
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.
What happens in the event of a forced buyout?
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.
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Written by
Loans Expert
Shaun McGowan
Reviewed by
Editor
Sean Callery
