Partner buy-outs are rarely commercial negotiations. They sit at the intersection of valuation, tax, governance and cash flow.

Get the number wrong and one party overpays. Get the structure wrong and the tax outcome can be inefficient; or worse, challenged.

At RJD Advisory, we approach partner buy-outs with one principle:

Separate the emotional issue from the economic one. Then, provide detailed documentation of the economics.

When Do Partner Buy-Outs Arise?

Common triggers include:

• Retirement or succession

• Relationship breakdown

• Strategic disagreement

• Performance disputes

• Health issues

• External investor entry

• Divorce or family law matters

No matter what caused it, the main question remains: What is the business interest worth on that date?

And that answer must withstand scrutiny: both commercially and by the ATO.

Step One: Determine the Value of the Business

A partner buy-out starts with valuing the whole business or the enterprise value. The most common approaches are:

• Capitalisation of maintainable earnings

• Discounted cash flow

• Market approach

• Net asset value

The business valuation date is critical. In disputes, a few months can significantly alter value.

Step Two: Bridge to Equity Value

Enterprise value is not the amount payable to a departing partner.

We need to adjust for net debt, shareholder loans, preference shares, and other non-operating assets or liabilities. Only then do we determine the equity value.

If a partner owns 30%, they are generally entitled to 30% of equity value, subject to:

• Shareholders’ agreements

• Partnership deeds

• Minority discounts

• Marketability considerations

ATO Requirements and Tax Implications

Partner buy-outs are not just business valuation exercises. They have tax consequences under Australian law. The ATO expects transactions between related parties to occur at market value.

This is especially important for market value substitution rules and capital gains tax rules.

Market Value Substitution Rule

If a business interest is sold for less than its market value, the ATO can use the market value for tax purposes. This means:

• The seller may be taxed on a higher deemed gain

• The buyer may not benefit from an artificially low purchase price

A properly supported business valuation reduces this risk.

Capital Gains Tax (CGT)

For the exiting partner, a buy-out is usually a CGT event. The capital gain is broadly: sale proceeds less cost base. If eligible, the seller may access:

• 15-year exemption

• 50% active asset reduction

• Retirement exemption

• Rollover relief

These concessions can significantly change the net outcome. The business valuation therefore has a direct effect on the tax payable.

Buy-Out Structures and Their Implications

There are many ways to structure a buy-out:

1. Direct Share Transfer

The continuing partner(s) acquire shares directly.

2. Company Share Buy-Back

The company repurchases the departing partner’s shares.

3. Asset Sale Followed by Distribution

Less common but possible in partnership structures.

4. Loan-Funded Buy-Out

Often involving shareholder loans.

Each structure has different tax, cash flow and legal consequences. For example:

• A share buy-back may trigger dividend components.

• A loan-funded buy-out may raise Division 7A issues.

• A staged payment may require interest benchmarking.

These details matter.

Minority and Marketability Discounts

Not every partner interest is worth a simple pro-rata share.

A minority discount may apply if the departing partner can't control or influence the dividend policy.

But it depends on legal rights and practical influence.

If shares are illiquid and cannot be sold without difficulty, a marketability discount may be relevant.

These adjustments must be applied with precision and uniformity.

Goodwill and Key Person Risk

In many SMEs, goodwill drives most of the value. But not all goodwill is equal.

We distinguish between enterprise goodwill (transferable) and personal goodwill (attached to an individual).

If the departing partner is vital for client relationships or revenue, the valuation must consider transition risks, client retention, and earn-out considerations. Failing to assess this properly can result in overpayment.

Funding the Buy-Out

Even if we agree on the number, we must source the cash from somewhere. Funding options affect leverage, cashflow, risk value and future enterprise value and include:

• Existing cash reserves

• External debt

• Vendor finance

• Instalment arrangements

• Conversion to shareholder loans

A buy-out that over-leverages the business can destroy value for the remaining partners.

Common Errors We See

• Using book value instead of market value

• Ignoring shareholder loans

• Failing to normalise earnings

• Not separating personal and enterprise goodwill

• Overlooking CGT consequences

• Not stress-testing cash flow post-buy-out

• Relying solely on formula clauses without economic review

Buy-out clauses in agreements can be old and may not match today’s economic reality.

Documentation and Defensibility

For ATO and commercial protection, a partner buy-out business valuation should include:

• Clear valuation date

• Detailed financial analysis

• Explanation of normalisations

• Method selection and justification

• Consideration of discounts (if any)

• Sensitivity analysis

• Clear articulation of assumptions

If reviewed, the business valuation should demonstrate:

• Independence

• Commercial logic

• Consistency with market evidence

Strategic Perspective

A partner buy-out is not just about exit.

It is about:

• Protecting the remaining business

• Preserving relationships

• Maintaining lender confidence

• Avoiding tax inefficiency

• Preventing future disputes

Handled correctly, it can strengthen the business. Handled poorly, it can destabilise it.

Final Thoughts

Partner buy-outs in Australia require:

• Accurate, independent business valuation

• Clear understanding of ATO market value requirements

• Careful CGT planning

• Structured funding analysis

• Clean documentation

The number must be fair. The structure must be tax-aware. The funding must be sustainable.

At RJD Advisory, we business valuations that are commercially realistic, tax-aware and defensible.

Clear valuation. Structured execution. No surprises.

📞 Book a free consultation today to discuss a business valuation.