Buying out a business partner

When partners part ways

Business partnerships end for many reasons: retirement, illness, a change of direction, a disagreement about growth or simply a wish to move on. Whatever the reason, the remaining owner usually wants a clean separation that keeps the business running and treats the departing partner fairly. Money is often the sticking point. The departing partner wants to be paid, and the business rarely has spare cash sitting idle.

Property-secured finance offers a practical solution. If the remaining owner holds equity in a home, investment property or business premises, a secured loan can fund the payout quickly, allowing the separation to be completed without draining working capital.

Step one: read your agreement

Start with your shareholder agreement, partnership agreement or unit holder deed. Many include clauses on exit: how the share is valued, who has first right to buy, payment timing and what happens to guarantees. If your agreement sets a method, follow it. If there is no agreement, or it is silent, you will need to negotiate, ideally with advice from a solicitor and accountant.

Step two: value the share

A fair, independent valuation avoids arguments and gives a lender confidence that the price is reasonable. Business valuers typically look at earnings, assets, industry multiples and future prospects. Consider whether the price includes the departing partner’s share of retained profits, loan accounts and any property owned by the business.

Step three: agree the terms

Beyond the price, agree on:

• The settlement date and any conditions
• Whether payment is all upfront or partly over time
• Release of the departing partner from personal guarantees and security
• Non-compete and non-solicitation terms
• Handover of clients, staff and supplier relationships
• How business debts and liabilities are dealt with

Put the terms in a written agreement prepared by a solicitor.

Step four: arrange the funding

Common funding sources include business cash reserves, an existing bank facility, vendor terms from the departing partner, a new equity partner or a property-secured loan. Many buyouts use a combination.

A private secured loan works well when speed matters, when the bank needs more time to assess the business under single ownership, or when the remaining owner has strong property equity but the business’s recent figures have been affected by the partnership split. The loan can be secured by a first or second mortgage over the remaining owner’s property. The equity release estimator gives a rough idea of how much may be available.

Untangling shared security

In many partnerships, both partners have signed guarantees and provided security for business loans. At the buyout, the departing partner will want those released. Existing lenders will usually only release a guarantor if the debt is repaid, refinanced or replaced with other security. Plan this carefully: the buyout loan may need to be large enough to refinance existing facilities as well as pay out the partner.

If any business debt is secured over the departing partner’s home, that mortgage must also be released. This is often a condition of the buyout agreement.

Step five: plan the exit

The buyout loan needs an exit. Common exits include refinancing to a bank once the business has financial statements under single ownership, selling an investment property, or repaying from business profits over the term. Because the departing partner is often taking a share of earnings with them, the remaining owner may have more profit to work with, which can support a refinance.

Illustrative example

Two directors own an engineering consultancy equally. One wants to retire. They agree on a price based on an independent valuation. The remaining director owns her home with substantial equity, and the business has an overdraft guaranteed by both directors. A private lender provides a twelve-month first mortgage over her home, funding the payout and clearing the overdraft so the retiring director’s guarantee can be released. Interest is capitalised. After a full year of financial statements under single ownership, she refinances to a bank facility.

This example is illustrative only.

Keeping the business steady during the change

A buyout is unsettling for staff, customers and suppliers, even when it is amicable. Agree how and when the change will be announced, and who will speak to key clients. Make sure bank signatories, supplier accounts, insurance policies and licences are updated promptly. If the departing partner held important relationships, plan a handover period in the agreement. Lenders reviewing a later refinance will look at whether revenue held up after the change, so a smooth transition supports your exit as well as the business.

When the relationship is strained

Not every separation is friendly. If partners are in dispute, a quick, funded offer can be the best way to resolve things before legal costs mount. Having finance arranged in principle strengthens your negotiating position, because the other side knows payment is real. Be careful not to commit to a settlement date before the loan is approved, and keep all negotiations in writing through your solicitor.

Tax and legal considerations

Buyouts can have tax consequences for both sides, including capital gains tax for the departing partner and questions about how the purchase is structured. Get accounting advice before agreeing the terms. A solicitor should prepare the share transfer, update company records with ASIC and make sure the departing partner resigns as a director where appropriate.

Getting started

If you are planning a partner buyout and own property with equity, check your eligibility with no credit check. Tell us the agreed price, what existing debts need refinancing and the property you can offer as security.

Start your enquiry to see what is possible.