How to fund a business partner buyout

How can I finance a business partner buyout?

When it comes to buying out a business partner, one of the biggest challenges you may face is how to finance the transaction. Whether you're acquiring your partner's stake in the company due to retirement, a change in business goals, or a desire to move on to new ventures, you'll need to have a solid financial plan in place to make the transition as smooth as possible. 

The thought of financing a buyout of a business partner can be daunting, especially when you consider that it will likely require a significant amount of money. This can be a challenging task, and it's important to approach it with care and consideration. 

Here are some of the potential issues you may face when trying to finance a buyout, and some suggestions for how you can secure the funds you need.

The problems of financing a buyout personallyAn obvious standard option considered for a shareholder buyout, is for the remaining shareholder/s to fund the purchase of the shares personally, meaning that they will have to find the funds themselves.  However, it's important to note that using personal funds to finance a business buyout can be extremely risky, and more importantly than that, where do you find the funds from in the first place?  All options of using personal funds also means that you are using money that you have already had to pay tax on, therefore means they are also not tax efficient.

Below are some ways of how you could secure the funds you need personally and the problems they pose:

1. Personal savings: If you've been able to save a significant amount of money, this may be an option for financing the buyout. However, it's important to consider the potential impact on your personal finances and life-needs – is this the best strategy for your hard-earnt cash?
    
2. Borrowing from friends and family: If you have friends or family members who are willing to lend you the funds you need, this could be option. However, it's important to approach these loans with caution and ensure that you have a clear agreement in place for repayment.  What if these family members need the money back in a hurry?
    
3. Selling assets: If you have assets that you can sell, such as real estate or vehicles, this can be an option for raising the funds you need. However, it's important to consider the potential impact on your personal finances and ensure that you're not sacrificing long-term financial stability for short-term gain.
    
4. Financing options: There are a variety of financing options available for business buyouts, including loans from banks or other financial institutions. However, these options may come with higher interest rates and other fees – all adding to the ongoing costs and financial burden of a buyout scenario. 

Can I use company money to buy out a shareholder?If your company has a healthy cash flow and is generating profits, is there a way of using these company funds to finance the buyout?

Using company money is often the only way that the remaining shareholder(s) can afford to buy the leaver’s shares.  This is certainly possible, but it does need to be done correctly if it is to be effective and tax efficient.

What are the potential problems of using company money for a buyout?There are various different routes of using company funds to achieve a shareholder buy-out.   However, there can be significant challenges with these, both from a tax perspective, and more importantly, from a cashflow perspective.

Mostly these options are not flexible in the way the payout can be structured and usually require all the cash immediately on completion, which can be a significant financial burden for the company in one hit, whilst not jeopardising the continuing trading of the business.

The other considerable issue with traditional methods is the fact that there is likely to be Stamp Duty payable on the transaction, which can extend into substantial sums of money!  The result of the payout can also cause issues for the recipient, potentially exposing their personal estate to Inheritance Tax - a costly exposure.

However, there must be a better way that works for everyone?

Is there a better way of funding a shareholder buyout?At Oldfield Advisory, we have developed a Holding Company Buyout solution, which means that:

• Funds come from the company, rather than personally
• You have the ability to stage the buy-out payments, which assists cashflow
• The recipient of the buy-out is protected from Inheritance Tax exposure
• Stamp Duty on the transaction is mitigated, or even eliminated

Holding company buy-outs are a very specialist area, and it is important to consider numerous factors and understand the tax implications.

There are several financing options available for buying out a business partner. Ultimately, the best option for you and your business will depend on a variety of factors, including your financial situation, business goals, and the terms of the buyout scenario. It is important to get quality professional advice, to ensure that buy-out structure is set up correctly and that all tax implications are considered. At Oldfield, we offer an integrated legal, accounting, and tax advice approach to help shareholders plan and execute a successful exit strategy or business partner buy-out. 

If you would like further guidance on shareholder buyouts or to book a free consultation to discuss your specific requirements with one of our tax consultants - please fill out the form below

Please note: This article is provided for information only and was correct as at time of writing (06/04/23). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.