Are there ways to creatively finance or shelter a partner buying out a senior partner?

Answer 1

There are many ways this can be accomplished. The first thing to realize is that the structure of the transaction must work for both parties. I know, that's simple, but it's often overlooked in the early discussions (and offers) and the whole deal can go down quickly if both parties don't recognize this.

I have sold 6 businesses, and bought one (which I kept 10 years then sold), and each deal had a different structure. Here is a summary that might help you.

The seller (usually) wants to get as much cash up front as possible, but not always. Sometimes, tax considerations will allow him to take less up front than would be normal.

And the buyer (almost always) would like to put as little money up front as possible.

Since the discussion is about buying out a senior partner, here are a couple of ways the deal might be structured:

a. Pay x% down, then annual payments of X (plus interest) for the life of the buyout. Five to seven years is not an uncommon time for this.

b. Under certain conditions, the seller might want to sell to a long-time employee, and will give the buyer a much sweeter deal. In this case, I took 0 down, and scheduled two payments in the first year, based on cash flow that I knew would be coming in. We then scheduled an annual payment for 7 years, again based on cash flow that was expected.

For me, this deal provided me with a predictable stream of cash, and let the employee buy the business, in effect, using money that I would have made, had I chosen to stay active. Win-win.

There are many variations within this, but this should help you start thinking about it.

Good luck.

ADDITION: The poster below seemed to minimize the tax issues on a deal. The reality is that they can be large. Yes, the tax in most countries has a cap of about 40%. But, capital gains tax is just 15%. That's a big difference. And he way the deal is structured can make that difference.

Answer 2

The first poster gives a good answer, clearly borne of experience. I would recommend that, whatever you do, you do not let the "tax tail" wag the "commercial dog". In most countries, tax is only 40% of any transaction. That is not to say you should ignore it. Just don't let a "tax-free" deal get in the way of a deal that actually puts more dollars in your pocket.