When do SMEs need buyout or succession funding?
Ownership changes are one of the most common reasons an established, profitable business suddenly needs a large sum. Typical triggers include:
- A co-founder wants out. The partnership has run its course or one owner wants to retire or move on.
- A family succession. Parents step back and one child takes over, needing to pay out siblings or the parents’ share.
- A key manager buys in. A long-serving manager purchases a stake, often funded partly by borrowing.
- A shareholder dispute. Buying the other party out is often cheaper than a prolonged disagreement.
- An estate situation. After a death, the surviving owner needs to pay the estate for its shares.
Each of these has the same core problem. The business is worth a lot, but the person staying on rarely has that value sitting in cash.
Why can succession be hard to fund through a bank?
From a lender’s point of view, a buyout adds debt without adding assets or sales. The company is the same business it was yesterday, now with an extra loan. Where the departing owner was the face of the business or held key relationships, lenders also worry about customer loss.
That is why property security often does the heavy lifting. If the continuing owner, or a supportive family member, owns a home, rental, commercial building or land, a first or second mortgage can fund the payout while leaving the business’s own cash for trading. No financials or tax returns are needed for the initial assessment of a property-secured loan.
How should the payout be structured?
There is rarely one right answer, but the usual building blocks are:
| Component | What it does | Things to consider |
|---|---|---|
| Lender funding | Pays a lump sum to the departing owner at settlement | Security, repayment plan, timing |
| Vendor deferred payment | Departing owner is paid in instalments | Their risk, security for their balance, interest |
| Earn-out | Part of the price depends on future results | Clear targets, disputes, the departing owner’s ongoing role |
| Company cash | Retained earnings fund part of the price | Solvency, working capital left behind |
The mix affects tax, company solvency and relationships, so your accountant and lawyer should be involved early. Our guide on succession planning and how to fund it goes deeper.
What about the value?
Agreeing a price is often harder than raising the money. Check whether your shareholders’ agreement or partnership agreement sets out a valuation method or a formula. If it does not, an independent valuation from an accountant or business valuer gives both sides a reference point. Our guide on how to value a small business explains the common approaches, including earnings multiples and adjusting for owner’s wages.
Keeping the business stable during the change
Ownership changes unsettle staff, customers and suppliers. Some practical steps:
- Agree the message. Customers and staff should hear the same, confident story from both owners.
- Protect key relationships. A handover period where the departing owner introduces the continuing owner to key accounts is worth including in the agreement.
- Keep working capital intact. Avoid paying out the departing owner from the trading account if it will leave the business short. A separate facility is usually safer.
- Update guarantees and bank mandates. The departing owner will want to be released from personal guarantees; plan for how that happens.
Example scenario
Example scenario, generic and for illustration only. Two directors of a Waikato transport business agree that one will retire. The retiring director’s shares are valued by an independent accountant. The continuing director arranges a property-secured loan over her home for the settlement payment and agrees a smaller deferred amount with the retiring director over two years. The business’s own overdraft and cash reserves are left untouched for trading.
Questions SME owners ask
Who borrows in a partner buyout: me or the company?
Either can work. The remaining owner may borrow personally or through a holding company, or the company may borrow to buy back shares. Your accountant and lawyer should confirm the tax and company law treatment before the structure is settled.
What if my business partner and I disagree on the value?
Check your shareholders' agreement first, as many set out a valuation method. If there is none, an independent valuation is usually the fastest route to a number both sides accept. Funding can be arranged once a price is agreed.
Can a family member put up their property to support the loan?
Yes. Security can be property owned by the borrower or a supporting party, such as a parent or family trust. Supporting parties should get independent legal advice before signing.
Can the retiring owner be paid in instalments instead?
Yes, and many succession deals mix a lump sum from a lender with deferred payments to the retiring owner. Our guide on earn-outs and deferred consideration covers the pros and cons.