I am a Director of a growing small business and have a mutual agreement with my partner to buy him out at the end of this calendar year. It's a reasonably significant amount, so will need to borrow the money. What's the best way to go about this? Can I borrow the money through the business or do I do it personally? Both my personal and business financials are quite sound.
It is difficult to say which way would be the best but if the loan funds are held by you as an individual you will need sufficient security (equity) in a property to obtain the required funds.
Alternatively, you can do it through the business as a commercial loan.
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I'm currently helping a small business client do the same and they've opt to borrow in their company with the lender.
Has the company been operating for longer than 24mths? What type of business is it?
Without knowing the full picture it's difficult to give the advise, however you have options to do it in either your business or an individual. Best you speak to finance broker (because not all lenders will do this) and go through in more detail to get the options and then discuss the options with your accountant to get the advise in which way they prefer you do it.
Happy to discuss further if you still need assistance.
All the best,
Hi Jarrod, you'd need to get some advise from your Accountant which way to approach it, although in general so long as the necessary security/guarantees are in place, your Bank should be able to structure the transaction anyway you like. As a guide, if you are likely to be in a position whereby you don't have sufficient property to secure the debt & need to borrow the funds against the business cashflow only, you would likely to be looking for the balance sheet of the business to show equity of around 30% after the extra debt is included & forecast EBIT interest cover (EBIT / forecast interest) to be at least 2x. Different Banks will have different benchmarks, but this will at least give you abit of a guide/method or working out where you need to be to get the deal done. Cheers.......
Thanks all, much appreciated.
Quick background - Business is strong, about 15 years old but I've only been a partner for 2 years. I have reasonable equity in my home but not enough to cover the amount required. I'll talk to my accountant and broker and see how we go from there.
Definitely seek advice from your accountant as to the best way to achieve this. If your accountant advises that you should raise capital through your business, there are a number of options, depending on what your business does.
For example, you could raise fund against existing equipment through what is known as a 'sale-back'. This essentially means that you sell your unencumbered assets to a lender, and finance it back, giving you a cash injection.
If your business sells on credit terms to a broad range of business customers, then you may also benefit from a confidential debtor finance facility, to smooth out cashflow, especially in the transition period.
Thanks for posting your question. As already noted, there are so many variables involved that it's impossible to address your options in any detail here. Of course, bank borrowing/ debt funding is a common and often sound solution but it's not the only one. Then, as you've raised. there's the question of ownership and how to structure your funding.
You'll also need to consider things like the company's prospects (how big will you grow?) , tax planning, asset protection, succession and exit planning, etc before making any decisions. Getting some ideas here is a great start but could I implore you to not see this as a 'transactional' or short term issue, ie get it sorted asap and then back to business. This transition of ownership has long term implications for you (and family), your company, your team and other stakeholders.
It's a great opportunity to best position your company into the future - so it's also the perfect time to build a team of professionals and advisers to support and guide you on your journey. I'd be happy to understand more of your business to see how I might best help, and also recommend other specialists to you. Cheers, Wayne
Something else you may like to consider is Buy/Sell Cover which is generally not well covered for an Involuntary departure within a Partnership Agreement (legal document) or Rule Book, which you should have in place rather than a mutual verbal agreement.
Buy/Sell cover and Key Man cover would relevant to your business especially if the business is growing in value.
Please get in touch should you like to discuss further.
This is a fantastic opportunity for you and for the business to reset and restructure for the future.
I would suggest that a new vehicle such as a discretionary trust could buy the entire company from the partnership so that with the help of your accountant and adviser you can minimise tax to be paid now and into the future.
The fact that you can plan this now also gives you two financial years in which to effectively transfer ownership in an equitable and tax effective way. Your business partner may accept a lower price if they can sell you 25% in this financial year and 25% next financial year to minimise their assessable capital gains tax amount.
The finance required will depend on the specifics of your current financial position and how much you need and should be a combination of contributed equity, business loan, asset finance, cash flow finance and overdraft facilities.
There are many questions and many options to be explored
Feel free to get in touch if you would like to expand on any of these points
Best of luck
Dear Jarrod, you really have several options and they depend on the circumstances of your particular situation. If you're a homeowner, you can draw against your mortgage and that is normally a cost effective way of doing it. Having said that, any personal loan that you take will result in your interest payments not being tax deductible.
Another option is an unsecured business loan, like the ones offered by Sail (www.sail.com.au). At Sail we can offer you an unsecured loan of up to 100k at very competitive rates. Feel free to reach out to us and get free advice from one of our customer service reps at 1300 00 SAIL.