Borrowing against property to buy out a business partner

Partnerships end for all sorts of reasons: retirement, a move interstate, different ambitions, a falling-out. When one partner wants to stay and keep the business, the remaining partner often needs a significant sum quickly, and property equity is where many look first.

It can be a very sensible use of a second mortgage. It also has a trap that a straightforward business purchase doesn’t: the business loses a working owner at exactly the moment it takes on debt.

What does your agreement say?

Before valuations or finance, read your partnership agreement, shareholder agreement or unitholder agreement. Many set out:

• How a departing owner’s share is valued.
• Whether the remaining owners have first right to buy.
• Timeframes for payment.
• Whether payment can be made in instalments.

If there’s no agreement, or it’s silent, you’ll need to negotiate these points. A lawyer for each side is money well spent. business.gov.au’s guide to business structures is a useful reminder that partnerships, companies and trusts each handle ownership changes differently.

How do you agree a fair price?

A partner buyout is a negotiation between people who know the business intimately and may not agree on what it’s worth. An independent valuation helps both sides start from the same place. It also gives you, as the buyer, confidence that you’re not borrowing against your home to pay more than the share is worth.

Remember that the price of a share in a business may not equal a proportion of the whole business’s value. Control, minority discounts and the terms of your agreement can all affect it.

Can the business carry the loan without them?

This is the question most often skipped. The departing partner probably did real work: sales, operations, client relationships, technical skills. When they leave:

What leaves with them	Possible effect
Client relationships	Some revenue may follow them
Hours worked	You may need to hire, at a cost
Skills or licences	Some work may pause until replaced
Their drawings	These stop, which helps cash flow

Build a cash flow forecast for the business without them, including any replacement hire, and check it still supports the loan. business.gov.au’s cash flow statement template is a practical starting point.

If the forecast looks solid, you can ask a specialist to test the funding. There’s no credit check when you first enquire.

Which property should secure it?

Use a property the departing partner has no interest in. If they co-own the property you have in mind, they would need to sign the mortgage, and asking someone to secure the loan that pays them out creates an obvious conflict. Your own home, an investment property in your name, or premises owned by the continuing business are cleaner.

If the property is jointly owned with your spouse, they’ll need to agree too. See talking it through with a co-owner.

Can you reduce how much you borrow?

Several approaches can shrink the loan:

• Staged payout. Part at settlement, the remainder over an agreed period from business cash flow.
• Bring in a new investor for part of the share, so you don’t buy all of it. See taking on an investor.
• Retained earnings. If the business has cash reserves, part of the payout may come from those, subject to advice.
• Sell a non-core asset the business no longer needs.

What exit fits a partner buyout?

• Refinance once the business has a trading record under the new ownership, often twelve months or more.
• Cash flow, if the amount is moderate and the business’s surplus is reliable.
• Sale of an asset, such as an investment property or equipment.

As always, put a date and a fallback against it. See planning the exit.

An illustrative example

Two partners own an engineering consultancy equally. One is retiring. The agreed independent valuation puts the retiring partner’s half at $500,000. The continuing partner’s forecast shows the business can absorb the loss of the retiring partner’s hours by hiring a senior engineer, with a reduced but positive surplus.

The retiring partner agrees to take $350,000 at settlement and $150,000 over 18 months. The continuing partner borrows $350,000 against an investment property worth $1,000,000 with $250,000 owed, a combined LVR of 60%. The exit is a refinance into a business loan after 12 months of figures under the new structure. Illustrative only.

Protecting both sides

A fair buyout leaves both partners whole and the business able to carry on. Separate legal and tax advice for each person, an independent valuation, a written agreement covering timing and any staged payments, and a realistic forecast all protect the relationship as well as the finances.

What if the departing partner is also a guarantor?

If the departing partner has guaranteed existing business debts, they’ll usually want to be released as part of the buyout. That may require the lender’s agreement and, sometimes, new security from you. Raise it early in negotiations so the funding plan accounts for it.

Talk through funding the buyout

If you’re working through a partner buyout, send a short enquiry with the agreed or expected price, the property you’d use and how you plan to repay. One specialist will look at it, there’s no credit check to ask, and your details stay with that person. Please be accurate about the price, the property’s value and what’s owed on it, and whether anyone else is on the title.

Ask about funding a partner buyout →