Buying out an exiting business partner: a staged company share buyback for a dental equipment supplier

At a glance

A Huntingdon business supplying equipment to dental practices had been owned roughly 50/50 by two business partners for many years. When one of them decided to leave, the two agreed a mid six-figure price between themselves and asked us to put the exit into effect. We acted for the company, which bought back the departing partner's shares out of its distributable profits. Because a company has to pay for its own shares at the time it buys them, the price could not simply be deferred, so we structured the exit as a series of buybacks at intervals, each paid in full when it completed. The first completed in July 2023, about eight weeks after we were instructed, and the business has been growing since.

The client and the objective

The partners had built the business together over a number of years and the separation was fairly amicable. They had already agreed the price through their own negotiations. What they needed was a structure under which the company would fund the exit over time, within the rules on companies buying their own shares, while giving the departing partner a clean break and protecting the business they were leaving behind.

The company is also a client for its commercial work: we later rewrote its terms of business, which had been drafted before Brexit and the pandemic.

The deal

• A review of the company's articles and the existing shareholders' agreement, and of the exit process they set out.
• An initial buyback of part of the exiting partner's shares, completing about eight weeks after instruction.
• Further buybacks of the remaining shares at agreed intervals, each paid in full on its own completion and funded from distributable profits.
• Release of the exiting partner's personal guarantees.
• Restrictive covenants from the exiting partner to protect the business.
• Resignation as a director and a waiver of claims against the company.
• Shareholder approval, cancellation of the shares bought back, and the Companies House filings and stamp duty at each stage.
• Close working with the client's tax adviser on the tax treatment.

Key legal issues and how we solved them

Paying in stages when a buyback cannot be deferred

Under the Companies Act 2006, a company buying its own shares must pay for them when it buys them; outside employee share schemes, the price cannot be left outstanding as a debt. That rules out deferred consideration, the usual way of spreading a price. Instead, the company bought the shares in tranches. Each buyback was a complete transaction in its own right: approved, paid for in full and the shares cancelled. Until the last tranche, the departing partner remained a shareholder for the shares not yet bought back.

Distributable profits at every stage

Each buyback had to be funded from profits available for distribution at the time it completed, not just at the start. The timing and size of each tranche therefore had to fit the company's accounts, and the directors had to be satisfied before each payment that the profits were there.

Following the process the documents set out

The company already had a shareholders' agreement and articles covering a shareholder's exit. They did not cause any difficulty, but they had to be followed step by step, alongside the Companies Act requirements for an off-market buyback: shareholder approval of the buyback contract before it is entered into, with the exiting partner's own shares not counting towards that approval, and the returns at Companies House afterwards.

A clean break on both sides

The exiting partner was released from the personal guarantees given for the business, resigned as a director and waived any claims against the company. In return, the company had restrictive covenants protecting the business and its customer relationships after the partner left.

Tax

A buyback can be taxed as income (as a distribution) or as capital, depending on whether certain conditions are met, and the difference can be significant for the person selling. We worked alongside the client's tax adviser so that the legal structure and the tax position were settled together.

Outcome

The first buyback completed in July 2023, about eight weeks after instruction, and the remaining shares were bought back in stages after that. The remaining partner now owns the business outright through the company, and it is doing well and growing.

What this deal shows

• Business partners going their separate ways is almost always best handled amicably, through negotiation.
• Where both sides are willing, there is nearly always a corporate solution. Here, staged buybacks worked around the rule that a buyback cannot be paid for later.
• Differences over valuation can be bridged. One method is the blind envelope: each partner writes down the most they would pay to buy the other out, and the higher offer wins.