What are my options for financing a partner buyout?

A partner buyout is rarely paid for with one loan. The buyer may put in their own money and borrow the rest, the company may buy back the departing partner’s shares, and the departing partner may agree to be paid over time. Which of these is open to you depends on how the business is organized and on what your partnership or shareholders’ agreement already says about price and payment.

Your own money plus a lender

BDC lists management and employee buyouts and family takeovers among the transactions its business purchase loan can fund, and says a financing structure may combine your own investment, a business loan and seller financing. A partner buyout is a different transaction, so ask any lender whether it treats it the same way.

Where government-backed loans stop

The Canada Small Business Financing Program guidelines say that a loan advanced to a shareholder to buy shares in a corporation, rather than to a small business to finance eligible assets, is not eligible. They also say the part of a price that a vendor finances cannot be covered by a program loan. If your buyout is a share purchase, plan for that program being unavailable for it.

Having the company buy the shares

A company can sometimes buy a departing owner’s shares itself. Under the Canada Business Corporations Act, a federal corporation may buy its own shares, subject to its articles, but not if there are reasonable grounds to believe it is, or would then be, unable to pay its liabilities as they come due, or that the realizable value of its assets would fall below its liabilities and stated capital. A provincial corporation follows its own statute, so confirm that test with your lawyer.

Seller financing and the paperwork after

Paying the departing partner over time is a negotiated term, so the schedule and any security belong in writing. BDC says its purchase loan can refinance seller financing. After closing, the CRA asks you to call it when a partnership’s structure changes, and says a change of partners can require a new business number and new program accounts. See also seller financing.