How to buy out a business partner without stalling the business

Partnerships end for ordinary reasons: one person wants out, someone is burnt out, a spouse moves interstate, or the two of you want different things from the next five years. Often the split is friendly. The money still has to be found.

A buyout is a business purchase with a twist. You already know the business well, but you are negotiating against someone who knows it just as well. That works in your favour on due diligence and against you on price. This guide covers the order to do things in, the tax points that shift the price, and how to pay for it. The lending angle has its own page: buying out a business partner.

What comes before the offer?

Start with paperwork, not numbers. Find the partnership agreement, shareholders agreement or company constitution, and read the exit provisions. Many contain a price formula, a notice period, a right of first refusal, or a rule that a particular event (death, illness, bankruptcy) triggers a compulsory buyout.

If you have no written agreement, the default rules for a partnership or company apply, and they are rarely tailored to you. That is a reason to put a proper deed in place as part of the buyout, not afterwards.

Then list every tie between your partner and the business:

• Personal guarantees on loans, leases, credit cards and supplier accounts
• Loans the partner has made to the business, or taken from it
• Assets in their name used by the business (a vehicle, a property, a trademark)
• Client or supplier relationships that sit with them personally
• Restraint of trade, so they cannot open next door in three months

Every item here either costs money to unwind or gives you something to negotiate with.

How do we agree on a fair price?

Skip the argument about “what it’s worth” by agreeing on a method first. Three common approaches:

Method	Mechanism	Main risk
Formula in the agreement	Multiple of earnings or net assets, set in advance	Formulas written years ago can be out of date
Joint independent valuation	Both sides appoint one valuer and accept the result	Cost, and a few weeks of delay
Negotiated figure, checked by an accountant	You agree a number, an adviser tests it	Works best when trust is high

Valuers usually look at maintainable earnings, net tangible assets and goodwill, then adjust for debt. The common methods are unpacked in how to value a small business. For a lender, an independent figure is also far more persuasive than a number you and your partner settled over coffee.

A point people miss: the value of a 50 per cent stake is not always half the value of the business. If the departing partner is a key person and clients leave with them, the business you keep may be worth less. If you are the key person, the opposite can apply. Adviser fees here are cheap compared with a mispriced buyout.

Which tax issues change the deal?

Tax is where a price that looks fair to you can look poor to them, so raise it early.

The leaver’s capital gain. Selling out is a CGT event for them. Small business CGT concessions from the ATO can cut or defer that tax when the basic conditions are met. In summary, those conditions include either aggregated turnover under $2m or net assets of no more than $6m, and the interest sold generally has to be an active asset. Further tests apply for the 15-year exemption, retirement exemption and rollover. If your partner qualifies, they may accept a lower headline price. If not, they may ask for more. Either way, they need their own accountant.

Loan accounts. If the business is a company, unpaid loans between the company and the owner (including Division 7A loans) should be sorted out as part of the exit. Otherwise the problem stays in the business you now own.

How the deal is structured. Buying shares, assets or a unit in a trust each carry different tax and paperwork. Duty differs between states and territories and can bite on some transfers, so get it confirmed in writing before you sign.

A list of prompts for that meeting sits in questions to ask your accountant before a business loan.

How can I fund the buyout?

Think about funding as a stack, rather than one loan for the whole price.

1. Your own cash or savings. Even a modest deposit shows commitment and lowers the amount lenders must fund.
2. Vendor terms. The departing partner agrees to be paid in instalments. This is common when both sides trust each other. See our vendor finance guide for how it is documented and secured.
3. A bank loan. If your business is established and well documented, a bank may fund a buyout at the lowest cost available. Take a bank offer seriously if you fit its criteria and the timing allows. Expect requests for valuation evidence, financials, and a forecast showing the business supports the debt without your partner.
4. A property-secured loan. If a bank can’t help in the time you have, or won’t lend against the goodwill, security over property can open larger amounts. On our side, loans secured by property start at $20k. The guide on borrowing against property for your business covers the mechanics.
5. An unsecured business loan. Smaller buyouts can sometimes be met without security, with the amount worked out from turnover and statements.

Lenders assess a buyout differently from an ordinary loan. They want to know whether the business still earns enough once the partner is gone: will clients stay, are key staff staying, and does one owner’s pay need to rise? Their serviceability test often removes the departing partner’s drawings and adds the new repayments. If you are unsure how that works, read what lenders mean by serviceability.

Mid-negotiation and unsure which layer to use? Tell us the price and the timetable and we’ll point to the likeliest fit.

A worked example

Picture a made-up scenario. Two partners run a plumbing and maintenance business with a combined annual turnover of about $2.4m. One wants to retire. An independent valuer puts the business at $900k, so the departing partner’s half is $450k.

The remaining owner can contribute $60k from savings. The departing partner agrees to carry $150k as vendor terms, repaid over 24 months. That leaves $240k to fund. The business is seven years old with clean statements, so the remaining owner approaches their bank first. If the bank’s timeline or criteria don’t fit, a property-secured loan against the owner’s home is the alternative, with a plan to refinance once the vendor balance has been paid.

Notice how three sources shrink the borrowing from $450k to $240k. That reduces cost and also makes the lender’s job easier.

What mistakes should I avoid?

• Settling the price before the paperwork. Agreement on a number without an agreed process for guarantees, loan accounts and restraints leaves gaps.
• Skipping the independent valuation to save a few thousand dollars, then fighting over the figure later.
• Forgetting the guarantees. Your partner’s name can remain on a lease or facility for years. Get releases in writing.
• Borrowing too much. A buyout adds permanent debt to a business that just lost a person. Test the numbers against a quiet quarter, using the business borrowing power calculator.
• Leaving the handover vague. Introduce yourself to key clients and suppliers properly, with your partner’s help, before they leave.

Ready to see how the funding could fit?

A partner buyout is one of the more personal deals a business owner does, and the funding shouldn’t add to the stress. Give us the price, what you can contribute and the completion date; that takes roughly a minute.

Your credit score stays untouched when you enquire, since nobody pulls your file at that point. Your story won’t be circulated among a crowd of lenders either. A real person reads your situation, considers what each part of the funding stack could look like, and calls you. Please be accurate about guarantees, other debts and the partner’s role, as that is what lets us suggest the right option the first time.

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