Buying out a business partner: valuing, structuring and funding the exit

Partnerships end for all sorts of reasons. One partner wants to retire, another wants to move interstate, a family member wants out, or two founders simply want different things for the business. Whatever the reason, the remaining owner often faces a large, one-off payment at the same time as running the company alone. Getting the funding right protects the business, the relationship and your own finances.

Step one: agree the value

Before any lender is involved, you and your partner need to agree what their share is worth. That might follow a formula in a shareholders’ or partnership agreement, an independent valuation, or a negotiated figure. Common approaches look at profit multiples, net assets, recurring revenue or a combination.

If there’s an existing agreement, read it carefully. Many agreements set out how value is calculated, how the departing partner must offer their shares and what timeline applies. Following it avoids disputes later.

An independent valuation can feel like an extra cost, but it often saves money by keeping negotiations calm and giving lenders confidence that the price is reasonable.

Step two: choose the structure

There are a few common ways to structure a buyout:

The company buys back the shares. The company itself pays the departing partner and cancels their shares. This keeps the debt in the company, but there are legal and tax rules to follow.

The remaining owner buys the shares personally. You buy the shares and the company stays as it is. The debt may be personal or in a holding entity, and repayment often relies on dividends or drawings from the company.

A new or incoming partner buys in. Someone else purchases some or all of the departing partner’s share, which can reduce or eliminate the funding you need.

Staged payments. The departing partner agrees to be paid part upfront and the rest over time, sometimes called vendor finance. This reduces what you need to borrow now.

Each structure has different tax, legal and funding consequences. Get advice from your accountant and lawyer on the best one for your circumstances before you approach a lender, because the structure decides who the borrower is.

Step three: understand how a lender will see it

The most important thing to grasp is that a lender assesses the business as it will be after the partner leaves. If the departing partner brought in clients, managed key relationships or did a lot of the work, the lender will want to know how those gaps will be filled. They’ll look at:

• Trading history. Bank statements and financials for the last one to two years.
• The impact of the exit. Which clients, staff or revenue might leave with the partner.
• Serviceability. Whether the business can carry the new debt plus existing commitments, without the partner’s input.
• Security. Property or business assets that support the loan.
• The transition plan. How the departing partner’s role will be handed over.

A clear plan showing how the business will keep trading strongly after the exit is often the deciding factor.

Step four: choose the funding

Cash flow loans. For smaller buyouts, an unsecured business loan or term loan based on trading may be enough. Terms are usually shorter, so repayments are larger.

Property-secured loans. For larger buyouts, property security is often the most practical route. Releasing equity from a home or commercial property can fund the payment over a longer term, keeping repayments manageable. See equity release for business and using your home as security.

A combination. Some buyouts use a property-secured loan for most of the payment and a smaller facility for working capital during the transition.

Vendor finance plus a loan. A portion paid to the departing partner over time, combined with a loan for the upfront amount, can reduce the total you need to borrow.

Step five: deal with guarantees and security

A departing partner has almost certainly signed personal guarantees for the company’s existing loans and leases, and they’ll want them released. Lenders don’t release guarantees automatically. Each lender will want to be satisfied that the remaining owners, and any new security, are enough on their own.

Make releasing the departing partner’s guarantees part of the deal, and talk to each lender early. Some may require a new guarantee from you or additional security. Check what’s registered against the company on the PPSR, too, as existing security interests may need to be updated. Our page on director guarantees and security explains what’s involved.

Protecting the business through the transition

A buyout is a period of risk. Clients may wonder what’s changing, staff may be unsettled, and the remaining owner takes on more work at the same time as more debt. A few steps help:

• Keep a cash buffer rather than borrowing the bare minimum.
• Agree a handover period where the departing partner introduces clients and transfers knowledge.
• Consider a non-compete or non-solicitation clause, with legal advice, so key clients don’t follow the departing partner.
• Communicate clearly with staff and key clients about what’s changing and what isn’t.

A worked example

Two partners have run an Adelaide bakery for twelve years. One wants to retire. They agree a value with help from an independent valuer and a structure where the remaining partner buys the shares personally. The remaining partner has a home with good equity. Rather than borrowing the full amount on a short unsecured loan, they arrange a property-secured loan over a longer term for most of the price, with the retiring partner agreeing to receive a smaller portion over two years. The retiring partner’s guarantees on the bakery’s equipment finance are released as part of the settlement, and they stay on for three months to hand over supplier and wholesale relationships.

When the exit isn’t friendly

Not every partnership ends on good terms. If there’s a dispute, the funding question gets harder, because lenders are wary of lending into a conflict that could affect the business. Try to settle the value and terms first, using a mediator or the dispute process in your agreement if needed, and get legal advice on your position. Once a signed settlement is in place, lenders can assess the deal on its merits. Funding is far easier to arrange for an agreed exit with a clear price than for a disagreement that may still end up in court.

Questions to settle before you sign

• Is the price agreed in writing, with the method used?
• Is the structure confirmed by your accountant and lawyer?
• Can the business carry the debt without the departing partner?
• Have all the departing partner’s guarantees been addressed?
• Is there a handover plan and, if appropriate, a restraint clause?
• Do you have a cash buffer for the transition?

Fund the buyout with a clear plan

Tell us about the business, the agreed value and what security is available through our short enquiry form. There’s no credit check to enquire, one team handles your file, and a real person will help you work out which funding structure suits the buyout before you commit. Talk through your buyout.