Buying out a business partner: funding the deal without sinking the business

Partnerships end for ordinary reasons. One partner wants to retire, move interstate, start something new, or simply do things differently. Sometimes the split is friendly; sometimes it’s tense. Either way, the partner who stays usually has to find a large sum by a fixed date while still running the business. That’s a lending problem, and it’s a very solvable one with the right structure.

How much do you really need to fund?

The agreed price for your partner’s share is only the start. A realistic funding figure usually includes:

• The price for their shares or partnership interest.
• Business loans they guaranteed. The departing partner will want out of every guarantee. If the lender won’t release them while the debt stays put, the loans may need refinancing in your name alone.
• Their loan account. In many companies, a partner has lent money to the business over the years. Repaying it is often part of the deal.
• Costs. Valuation, legal fees, accounting advice and lender fees.
• A buffer. The business may lose some revenue or need to hire while it adjusts to life without your partner.

Owners regularly underestimate the second and third items. A $400k share price can turn into an $800k funding need once a guaranteed equipment loan and an overdraft are added.

Who is buying: you, or the company?

The structure decides which lender you need and what security it will want.

Structure	How it works	Funding notes
You buy the partner’s shares	Shares transfer from them to you personally or to your entity	You borrow personally or through your entity, often secured on your property
Company buy-back	The company buys and cancels the shares	The company borrows; the buy-back must not materially prejudice its ability to pay creditors
Partnership interest	You acquire their share of the partnership’s assets	The partnership is dissolved or reconstituted, and the ATO may need a new registration
New entity buys the business	A new company or trust buys the whole business	Funded like a business purchase, using an acquisition loan

Under the Corporations Act, a company can buy back its own shares only if the buy-back doesn’t materially prejudice its ability to pay creditors and the proper procedure is followed. Share changes must also be notified to ASIC. For a partnership, business.gov.au notes that a change of partners dissolves the partnership, so check whether you need a new or reconstituted partnership with the ATO. Your accountant should settle the structure before you approach lenders.

What will a lender want to see?

A lender funding a buyout asks one question above all: does this business still work with one fewer owner?

• Who brought in the revenue? If the departing partner held the key client relationships, explain how they’re being handed over.
• Can the business service the new debt? Use last year’s profit, minus the departing partner’s drawings, plus any replacement salary you’ll need to pay.
• How was the price set? An independent valuation or a method in the shareholders agreement both help. A number that looks generous against earnings may be lent against only in part.
• What security is there? Business assets, a general security agreement over the company, and often property.

Run a quick check of what the business might carry with our business borrowing power calculator.

Funding options, from cheapest to fastest

1. Your bank. If the business has clean financials and the buyout price stacks up, your bank is often the cheapest lender. It already knows the account history, which helps. Ask early, because credit approval can take weeks.
2. Vendor terms from your partner. Your partner takes part of the price now and the rest over time. It lowers the loan and shows a lender that the seller believes in the business. See vendor finance.
3. Non-bank business lenders. More flexible on how income is shown and on goodwill-heavy businesses.
4. Property-secured loans. A first or second mortgage over your home or a commercial property can fund the gap, especially when the business’s own figures are mid-transition. Our second mortgage business loans page explains how that works behind an existing home loan.
5. Short-term private funding. When the shareholders agreement sets a hard completion date, a caveat or bridging loan can settle on time, with a refinance to bank money once the dust settles.

Facing a completion date and not sure which mix fits? Send us the outline of the deal and we’ll come back with options.

A worked example

Two directors own a refrigeration servicing company equally. One wants to retire. They agree on $520k for the 50% shareholding, based on an independent valuation. There’s also a $180k equipment loan both directors guaranteed.

• The retiring director agrees to take $370k at completion and $150k over two years, documented in a deed with a security interest over the shares.
• The remaining director borrows $370k against a second mortgage on their home, since their bank wants a full year of post-buyout figures first.
• The equipment lender agrees to release the retiring director’s guarantee once the remaining director re-signs alone, so no refinance is needed for that loan.
• After 12 months of trading, the second mortgage is refinanced into a bank term loan, and the vendor instalments continue from cash flow.

The total funding need was $520k, but only $370k had to come from a lender at the start.

Steps to take before the deadline

1. Read your partnership or shareholders agreement. It may set the valuation method, the timeline and who has the first right to buy.
2. Agree on the price and get it in writing.
3. List every loan, lease and guarantee your partner is attached to.
4. Ask your accountant about the structure and the tax consequences for each side.
5. Prepare a post-buyout budget showing how the business carries the new debt.
6. Choose the funding mix and approach the right lender with the full package.

Mistakes to avoid

• Forgetting the guarantees. A partner who leaves still liable for business debt is a dispute waiting to happen.
• Agreeing a price before speaking to a lender. Know what’s fundable before you shake hands.
• Draining working capital to pay the price. The business still needs cash to run on day one without your partner.
• Leaving vendor terms on a handshake. Instalments need a proper agreement covering default, security and interest.
• Choosing the structure for tax alone. A tax-efficient structure that nobody will lend against doesn’t help.

The business is yours now. Let’s fund it properly

Taking full ownership of something you’ve built together is a big moment. The financing shouldn’t be what holds up the handover.

The form takes about sixty seconds and enquiring won’t leave any mark on your credit file. Your deal stays with us, not shopped around to dozens of lenders. Someone on our team reads it and phones you to work through the numbers. Include the price, the completion date and the loans your partner is attached to, as accurately as you can, so our first suggestion actually fits the deal.

Start funding your buyout →