Partner buyout loans: how to fund buying out a business partner

Business partnerships end for all sorts of reasons: a retirement, a move interstate, a health change, a falling-out, or simply two people wanting different things. When one owner wants to keep going, a partner buyout loan provides the money to pay the other out for their share, so the business can carry on under single ownership.

It sounds like a business purchase, and partly it is. But buyouts carry their own wrinkles: you already know the business inside out, the price is negotiated with someone you know well, and the departing partner is usually tied into the existing debts through personal guarantees. This page covers how lenders see a buyout and how to structure one cleanly.

How is a partner buyout different from buying a whole business?

When you buy a whole business from a stranger, the lender’s main worry is whether you can run it. In a buyout, you’ve been running it already, which is a strong start. The questions shift:

• Can the business manage without the partner who’s leaving? If they brought in most of the clients, held the key licence or ran the workshop floor, the lender will want to know who fills that gap.
• Is the price supportable? An inflated payout loads the business with debt it can’t carry.
• What happens to existing loans? Facilities guaranteed by both partners usually need restructuring.
• Is everything agreed and signed? A buyout with an unresolved dispute is very hard to fund.

If you’re buying an entire business rather than a co-owner’s share, see business acquisition loans instead.

How should a buyout be structured?

The right structure depends on how the business is set up, and it affects tax, who signs the loan and what security is available. Get your accountant and lawyer involved early.

Business structure	Common buyout approach	Who usually borrows
Partnership	Continuing partner buys the departing partner’s interest	Continuing partner, often with property security
Company	Remaining shareholder buys the departing shareholder’s shares	Remaining shareholder personally, or a holding entity
Company	Company buys back and cancels the departing shareholder’s shares	The company, usually with director guarantees
Trust	Units or interests transferred to the continuing owner	Continuing owner or trustee company

For partnerships, business.gov.au recommends that a partnership agreement cover rules for adding or removing partners and how remaining assets are divided when the partnership ends. If yours does, that clause may already set the valuation method and payment timeframe. Shareholder agreements in companies often do the same.

What will a lender want to see?

A signed agreement. The price, the payment terms, the date ownership changes and any restraint on the outgoing partner competing or poaching clients.

A valuation. Either an independent valuation or a price calculated under the formula in your agreement, with workings a lender can follow.

Trading figures. Two to three years of tax returns and BAS, recent bank statements and current management accounts. Lenders will mentally remove the departing partner’s drawings or salary and add any replacement cost, such as a manager you’ll need to hire.

The existing debt position. Every facility, who guarantees it and what security is held.

Your own position. Assets, liabilities and any property that could provide security.

If you’ve got the agreement in principle, you can start a confidential enquiry about the buyout and we’ll look at how the funding might be put together.

How do you release the departing partner’s guarantees?

This is the step most owners don’t anticipate. Lenders rarely release a guarantor just because they’ve left the business. The facility usually has to be repaid or replaced with one where only the continuing owner is responsible. So a buyout loan often covers two things at once: the payout to the departing partner and a refinance of the business’s existing debts. The business debt refinance page explains how consolidating facilities works.

That combined amount is frequently more than the business can carry unsecured. Unsecured options, typically $5k to $500k sized on turnover and bank statements, suit smaller buyouts with strong trading. Larger buyouts are commonly funded with property-secured business loans from $20k to $5m, as first or second mortgages or caveat loans. Many continuing owners use equity in their home through a second mortgage behind the existing home loan.

What about tax for the partner who’s leaving?

The departing partner is effectively selling an asset, so capital gains tax may apply. The ATO says eligible small business owners can use four small business CGT concessions, and lists common eligibility tests: whether aggregated turnover is under $2 million or the business assets owned are under $6 million, along with age. Those concessions can change what price the departing partner will accept, so it’s worth both sides getting advice before the number is locked in.

Illustrative example

Illustrative example: two electricians have run a contracting company together for twelve years, each holding half the shares. One wants to retire to the coast. They agree a price of $350k for his shares, based on an independent valuation. The company also has a $120k equipment and vehicle facility both directors guarantee. The continuing director owns a home with substantial equity. A second mortgage of $480k funds the share purchase and pays out the existing facility, so the retiring director’s guarantee is released. The lender is comfortable because the continuing director has run the jobs and the client relationships for years, and a senior electrician is stepping up to supervise.

What does a buyout loan cost?

It’s priced on your circumstances: the security, the loan size and term, the business’s trading strength and your credit history. Expect establishment and legal fees, possibly a property valuation, and any break or early payout costs on facilities being refinanced. Don’t forget the non-lending costs: valuation fees, legal fees for the share or partnership transfer, and accounting advice on structure.

Common buyout mistakes

• Agreeing a price before checking it can be funded. Talk to a lender before the handshake, not after.
• Forgetting the guarantees. The departing partner may refuse to sign until they’re released.
• Underestimating the replacement cost. If your partner worked sixty hours a week, someone has to do that work.
• Skipping the restraint clause. A buyout funded on the client base needs the clients to stay.

Ready to take full ownership?

Buying out a partner is a big moment, whether it’s amicable or not. Finding out what’s possible is easy: the enquiry takes about a minute and there’s no credit check when you first reach out. We don’t scatter your details among a pile of lenders; a real person works through the buyout, the existing debts and the security you have, then gives you a call. Please give us accurate figures for the agreed price and the debts that need refinancing, so the first structure we suggest fits the whole deal.

Start your buyout enquiry →