How to buy out a business partner in Australia, and how their share is valued.
For partners, professional practices and company shareholders: the agreement, the steps, the price, ways to pay and the fee.
To buy out a business partner in Australia, follow your shareholders' or partnership agreement, have the business independently valued, pay the partner's percentage of equity value and record the transfer. Equity value is business value less debt plus surplus cash; the agreement usually decides whether a minority discount applies. Oliver Group's signed buyout valuations start at $1,495 + GST.
Where do I start when buying out a business partner?
Start with your shareholders' agreement, partnership agreement or buy-sell clause: it usually sets the process and often the price. Without one, the owners have to agree both, ideally in writing, before instructing a valuer. Court-ordered buyouts in oppression proceedings (sections 232 and 233 of the Corporations Act 2001) are covered on our shareholder dispute valuation page. Agreements usually settle:
- ·Trigger events (retirement, death, disability, deadlock), notice and timing.
- ·The price: a fixed figure, a formula, or market value as determined by an independent valuer.
- ·Who appoints the valuer if the owners cannot agree.
- ·Deadlock clauses, including shotgun clauses: in a shotgun clause, one owner names a price and the other chooses to buy or sell at it.
What are the steps to buy out a partner or shareholder?
Agree the process, appoint a valuer and get the signed report, then negotiate, document, pay and record the change. Amicable or not, the order is the same:
- 1Agree the trigger and process.
- 2Appoint the valuer, jointly if possible, with written instructions.
- 3Fix the valuation date.
- 4Send financial statements, the agreement and owner loan accounts.
- 5Receive the signed report.
- 6Negotiate the terms; a lawyer documents them.
- 7Pay the agreed price.
- 8Record the change: a share transfer or buy-back for a company, or an updated partnership agreement.
How is a shareholder's or partner's stake valued for a buyout?
The valuer values the whole business, converts that to equity value and takes the owner's percentage, less any discount the agreement allows. Business (enterprise) value usually comes from maintainable earnings and a multiple, or from net assets. Equity value is business value less borrowings and loans owed to owners, plus cash the business does not need to trade; a loan the departing owner owes the business is often set off against the price. Private company loans to owners or their associates can be treated as dividends under Division 7A of the Income Tax Assessment Act 1936; the accountant decides how they are dealt with. Our free buyout calculator does this arithmetic on the numbers you enter; it is not a valuation.
| Illustration only (made-up numbers) | How it is worked out | Amount |
|---|---|---|
| Business (enterprise) value | From the valuation | $3,000,000 |
| Less net debt | Bank loan $700,000 less surplus cash $200,000 | $500,000 |
| Equity value | $3,000,000 less $500,000 | $2,500,000 |
| 40 per cent share, pro rata | 40% of $2,500,000 | $1,000,000 |
| Same share with a 15 per cent discount, if the agreement allows it | $1,000,000 less 15% | $850,000 |
| Difference in price | $1,000,000 less $850,000 | $150,000 |
How can the buyout price be paid?
The price can be paid in cash, with bank finance, by instalments, through an earn-out or by a company buy-back.
- ·Vendor finance: instalments from the buyer or the business, usually with interest and security.
- ·Earn-out: part of the price depends on future results.
- ·Buy-back: the company buys the shares, which are then cancelled. Under section 257A of the Corporations Act 2001 it may do so if the buy-back does not materially prejudice its ability to pay its creditors and it follows the procedures in Division 2 of Part 2J.1.
- ·Buying back one owner's shares is usually a selective buy-back, which needs a special resolution with no votes in favour from the seller or their associates, or the agreement of all ordinary shareholders (section 257D), with notices lodged with ASIC beforehand (sections 257E and 257F). The constitution can also restrict buy-backs.
- ·Tax on a buy-back: part of a private company's buy-back price can be treated as a dividend, so the tax result can differ from a sale between shareholders: the accountant should confirm it before the price is settled.
What tax questions does a buyout raise?
A buyout can raise capital gains tax, the small business CGT concessions and, in some cases, market value substitution. The accountant applies these rules: Oliver Group prepares valuations only and is not a registered tax agent.
- ·Capital gain: selling shares is usually CGT event A1 (section 104-10 of the Income Tax Assessment Act 1997), so the seller may make a capital gain. For CGT, a partner has an interest in each partnership asset (section 106-5).
- ·Small business CGT concessions: Division 152 may reduce or disregard a gain; eligibility starts with the basic conditions in section 152-10.
- ·Market value substitution: section 116-30 can treat the seller as receiving market value for CGT instead of the price, where there is no price, where the price cannot be valued, or where the price is above or below market value and the owners did not deal with each other at arm's length.
- ·Buy-backs and CGT: a company buy-back is dealt with separately, under Division 16K of the Income Tax Assessment Act 1936.
Should we use one valuer or a valuer each?
One independent valuer, jointly instructed, means one fee and one number to negotiate from, and can be written into agreements. A valuer for each side means two fees, usually two numbers and a gap to close.
| Point | One valuer, jointly instructed | A valuer for each side |
|---|---|---|
| Fees | One fee, split as the owners agree | Two fees |
| Result | One signed report both owners see | Two reports, usually with a gap |
| Suits | Agreed exits and agreements naming an independent valuer | Owners expecting a dispute |
What does a buyout valuation report contain?
Every Oliver Group buyout valuation is a signed report setting out the value of the interest and the reasoning, prepared with the ATO's Market valuation for tax purposes guidance in mind. A second valuer reviews it before signing, and the working file is kept for ten years. It sets out:
- ·The interest valued, the standard of value the agreement uses and the valuation date.
- ·A concluded value and supportable range, with the method and evidence.
- ·Any discount or premium, and why.
- ·Assumptions and limitations, an independence statement and the signature of the valuer responsible.
- ·What is not included: tax advice, expert witness work or a cross-check against a second or third method.
What does a buyout valuation cost, and how do we start?
A buyout valuation costs a fixed fee set by the business's annual turnover, from $1,495 + GST under $2 million. To start, send the enquiry form; no documents are needed. We reply within one business day, and a fifteen-minute call confirms the package, fixed fee and delivery date. Everyone pays the same published fee. Delivery time starts once payment and all required information have been received. Each additional entity is +$795 + GST, common where the business sits in a company and a trust, and each retrospective (past) valuation date is +$495 + GST, both agreed in writing before work starts.
| Annual turnover | Fixed fee | Signed report in |
|---|---|---|
| Under $2 million | $1,495 + GST | 2 business days |
| $2 million to $3 million | $2,495 + GST | 3 business days |
| $3 million to $10 million | $3,495 + GST | 3 business days |
| Over $10 million | Quoted in writing before work starts | Date agreed before work starts |
- ·Corporations Act 2001 ss 232 and 233: oppression orders, Federal Register of Legislation
- ·Corporations Act 2001 ss 257A to 257J: share buy-backs, Federal Register of Legislation
- ·ITAA 1936 s 159GZZZP: off-market buy-backs, dividend component, ATO legal database
- ·ITAA 1997 s 104-10: CGT event A1, ATO legal database
- ·ITAA 1997 s 106-5: partnerships, ATO legal database
- ·ITAA 1997 s 116-30: market value substitution, ATO legal database
- ·ITAA 1997 s 152-10: small business CGT relief, ATO legal database
- ·Share buy-backs, Australian Taxation Office
- ·Private company benefits: Division 7A dividends, Australian Taxation Office
- ·Market valuation for tax purposes, Australian Taxation Office
Common questions.
Who can value my business partner's share so I can buy them out?+
An independent business valuer with no stake in the price can value it, but first check whether your agreement says who appoints one. For tax purposes, the ATO's market valuation guidance says you are responsible for ensuring the valuer is suitably knowledgeable and experienced, remains objective and supports the value with credible evidence. Oliver Group values businesses, shares and units; land and buildings need a property valuer.
How is a private company valued when one shareholder buys out another?+
The company's business is valued as a whole, usually from maintainable earnings and a multiple, or from net assets. Borrowings come off and surplus cash is added, giving the value of all the shares. The departing shareholder's price is their percentage of that equity value, less any discount the agreement allows.
Does a minority discount apply when one owner buys out another?+
A minority discount applies only if the agreement or the facts support one. Some agreements set a pro rata price with no discount; a clause that simply says market value can allow one, because a minority stake cannot control dividends or a sale. If the agreement is silent, the valuer decides from the facts. A premium is sometimes argued where the stake gives the buyer control.
How is goodwill treated when a partner leaves a professional practice?+
Valuers usually separate business goodwill, which stays with the practice, from personal goodwill, which rests on one practitioner's skill and relationships and may leave with them; what the price covers depends on the agreement. Business goodwill comes from the practice's name, systems, staff, recurring clients and contracts. The valuer separates them using evidence such as who holds key client relationships and whether restraints protect the practice.
How long does a buyout valuation take?+
A signed buyout valuation report takes 2 business days for a business with annual turnover under $2 million, and 3 business days from $2 million to $10 million. Over $10 million, the delivery date is agreed before work starts. Delivery time starts once payment and all required information have been received.
Valuation Clauses in Buy-Sell Agreements: Drafting Guide
Market Value vs Fair Value vs Fair Market Value: Standards of Value in Australia Explained
Who Can Value a Business in Australia? Qualifications, Credentials and How to Vet a Valuer
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