Written byShaun McGowan
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 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.
Shopping around for the right loan can save you thousands of dollars in interest and fees.
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.
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.
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 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.
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.
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.
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.
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.
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 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.
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.
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:
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.
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.
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:
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.
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:
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.
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.
|State Partnership Acts||State Business Authorities|
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.
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.
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.
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.
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.