Personal Finance

Selling ownership of 2-person corporation back to business partner. Best method?

  • Last Updated:
  • Aug 3rd, 2021 4:06 am
Feb 26, 2021
8 posts

Selling ownership of 2-person corporation back to business partner. Best method?

Asking for my family member, not myself.

She operates a small business with a partner. Legally, it is a limited corporation and not a partnership, even though it is run like one and there is 50-50 ownership. Now, her partner has offered to buy her out. She agreed, but the partner doesn't have all the funds in cash, so they asked her if they can take a loan out together now, use those company funds to buy her ownership back, and then it will effectively be their liability. They're also saying that this is the only way to do it because they are not allowed to buy their shares directly anyways. She is open to doing it if that is the only way, but it raised alarm bells because in her mind, the simplest solution should be that the partner raises cash on their own to buy her out, and not through the company of which she is an owner. She is going to speak to an accountant/lawyer, but asked me to also take a look online in case anyone is familiar with the process of buying out partners in a corporation.

Anyone have any insight?
3 replies
Deal Guru
User avatar
Mar 23, 2008
13006 posts
My insight is to tell them to sit down together with an accountant and their actual numbers a d figure out a solution. Getting half-assed answers third-hand based on incomplete information isn’t productive.

May 25, 2012
42 posts
If your family member will no longer have any ownership in the company, they should never be on the loan for the company.

Let's assume the equity value/valuation of the business is $100, each person owns $50 and no debt.

Below are potential ways to buy a partner out when the other person does not have all the cash required:
1. Buyer goes to lender and gets $50 of debt financing on the business, which is used to acquire the seller's stake. Seller thus never owns the company with this new debt on it.
2. Buyer goes to lender and gets $40 of debt financing (max amount being less than $50), and seller provides a vendor takeback loan (VTB loan or a fancy word for a 2nd debt with 2nd priority to main lender) at an agreed upon interest rate
3. Buyer acquires lender through a $40 upfront payment, and $10 earnout split equally over the first 2 years based on revenue, EBITDA or net income targets being met. If target is under or over-achieved, a higher or lower % of the earnout target is paid. If buyer is able to get $40 through debt financing and cash available, great. If not, consider doing a vendor takeback loan here too

There are lots of ways to skin the cat and get a deal done. Feel free to reach out
Deal Addict
Dec 7, 2011
3209 posts
This sounds like a leveraged buyout.

Takeovers of large companies are often financed by debt owed by the company itself. If that makes sense in a small business, and what tax implications it may have, is above my pay grade, I'm afraid.