Buying out a business partner is a major decision with several important considerations. It is worthwhile to seek professional advice to help you make the right decisions. In this article, we explore the key steps, considerations, and strategies involved to assist you in navigating this process.
Valuing your business
Valuing your business for the purpose of buying out a partner involves determining a fair price. There are a range of methods you can use to value a business including:
- The market approach
This involves comparing your business to similar businesses that have been sold recently.
- The income approach
This approach focuses on the future income potential of the business, often using methods like discounted cash flow analysis.
- The asset approach
This evaluates the net current value of the business’s assets minus its liabilities.
The right business valuation option depends on your specific financial circumstances, needs and goals.
The tax implications
Buying out a business partner can have a range of potential tax implications, including:
- Stamp duty on the transfer of ownership
The stamp duty implications of buying out a business partner can be significant and they will vary depending on the State or Territory where the transaction takes place. When buying out a business partner, stamp duty may apply to the transfer of assets such as real estate, shares, or business assets, depending on the structure of the buyout. The amount of stamp duty payable will vary based on factors such as the value of the assets transferred and the State or Territory’s specific stamp duty rates and exemptions.
- Capital gains tax (CGT)
Any CGT implications will vary depending on the structure of the business and the nature of the buyout. If the business operates as a partnership, the buyout might involve compensating the outgoing partner for their share of the partnership assets and goodwill. In this case, CGT could apply to any capital gain made by the outgoing partner.
If the business is structured as a company, buying out a partner may involve purchasing their shares. CGT could apply to any profit made on the sale of these shares, depending on factors such as the length of ownership and whether any exemptions or concessions apply.
The Capital Gains Tax (CGT) rollover or deferral concessions allow the deferral of CGT liabilities under specific conditions, which can provide significant tax relief. For example, the Small Business Rollover concession enables eligible small business owners to defer the capital gain by acquiring a replacement asset or improving an existing asset within a certain period. This can be particularly beneficial for exiting partners looking to reinvest in new business ventures or assets without immediately incurring a substantial tax liability.
- Fringe benefits tax (FBT)
The FBT implications of buying out a business partner depend on how the buyout is structured and the benefits involved. Generally, FBT may arise if benefits such as cars, loans or other non-cash benefits are provided as part of the buyout process. For example, if the buyout involves transferring assets or providing accommodation to the outgoing partner, these benefits could be subject to FBT.
- Goods and Services Tax (GST)
If the business is registered for GST, the sale of business assets may attract GST. However, the sale of a going concern (the entire business) can be GST-free if certain conditions are met.
- Restructuring and Entity Changes
If the buyout leads to a change in the business structure (e.g., from a partnership to a sole trader or company), there may be additional tax implications, including the need to register for GST or PAYG withholding, and potential changes in the tax rates applied to business income.
The legal implications
The legal implications of buying out a business partner may include drafting or amending existing partnership agreements, shareholder agreements, or the company’s constitution to reflect the terms of the buyout. For example, the purchase price, payment terms, and any conditions that must be met before the buyout can proceed. It is crucial to adhere to any corporate governance requirements and to comply with the provisions of the Corporations Act if the business is structured as a company.
In addition, legal documentation for the buyout must accurately reflect the transfer of ownership interests and ensure that any liabilities or obligations of the outgoing partner are properly addressed and discharged.
Financing options
Common financing methods for business partner buyouts include:
- personal savings
- accessing equity in existing assets or properties
- obtaining a bank loan or business loan secured against business
- seeking investment from external parties
- using retained earnings within the business.
The right financing option depends on your specific financial circumstances, needs and goals.
When buying out a business partner, there are several key accounting and legal steps that need to be taken to ensure a smooth and compliant transition. Given the complexity of the process, it is crucial to seek professional legal and financial advice to navigate the buyout and ensure all legal requirements are met. This helps mitigate risks and ensures a smooth transition for all parties involved.
If you are thinking about buying out a business partner, navigating the financial and legal complexities can be challenging. At Wilson Pateras, our experienced advisors are here to guide you through every step of the process, ensuring a smooth and successful transition. Please contact us for more information.
This content has been prepared by Wilson Pateras to further our commitment to proactive services and advice for our clients, by providing current information and events. Any advice is of a general nature only and does not take into account your personal objectives or financial situation. Before making any decision, you should consider your particular circumstances and whether the information is suitable to your needs including by seeking professional advice. You should also read any relevant disclosure documents. Whilst every effort has been made to verify the accuracy of this information, Wilson Pateras, its officers, employees and agents disclaim all liability, to the extent permissible by law, for any error, inaccuracy in, or omission from, the information contained above including any loss or damage suffered by any person directly or indirectly through relying on this information. Liability limited by a scheme approved under Professional Standards Legislation.
