Buying Out a Business Partner in BC: Price, Payment Terms and Releases

When a co-owner wants to leave, the remaining owner often wants to buy them out and keep the business running. Agreeing a number is only the start; how the buyout is paid for and papered decides whether it holds.

This article covers the terms that matter most in a partner buyout in BC: valuation, who buys, instalment payments and security, releases, and the corporate filings that follow.

Start with what you have already signed

Before anyone names a number, pull out the documents that already govern the relationship: the company's articles, any shareholders' agreement, and any partnership agreement if the business is not incorporated. These often decide much of the buyout:

• A buy-sell clause may set out how a departing owner's interest is offered, who has first right to buy, and on what terms.
• A valuation formula or process may name a valuator, a method or a fixed price that is reviewed annually.
• Payment terms may already provide for instalments over a set period.
• Share transfer restrictions in the articles often require director or shareholder approval for a transfer.

If you never signed a shareholders' agreement, the buyout is a negotiation from scratch. Our article on what happens when a shareholder wants out of a BC private company explains the broader exit routes. This article focuses on documenting the deal once you have decided to buy.

Price: agreeing what the interest is worth

There is no single "right" value for a private business. Common sources of a price include:

• a formula or process in the shareholders' agreement;
• an independent business valuation, sometimes one valuator jointly retained, sometimes one for each side;
• a negotiated figure, often informed by recent financial statements and the company's debts.

Points to settle explicitly in the agreement:

• The valuation date, especially if the business is changing quickly.
• Shareholder loans, meaning money the departing owner lent to the company, or owes it. These are usually dealt with separately from the share price.
• Adjustments, such as working capital, cash left in the business, or tax owing at the valuation date.
• Minority discounts, if the departing owner holds less than half and the documents are silent.

Who buys: you or the company

A buyout can be structured as a purchase by the remaining owner personally, or as a purchase by the company of its own shares. The choice affects tax for both sides, the source of funds and the legal rules that apply.

Under section 77 of the Business Corporations Act, a company may purchase its own shares if authorised by, and subject to any restriction in, its memorandum or articles. Section 78 then prohibits the company from paying for those shares if there are reasonable grounds for believing it is insolvent, or that the payment would make it insolvent. "Insolvent" here means unable to pay its debts as they become due in the ordinary course of business.

That test matters for the remaining owner as a director too. Under section 154, directors who vote for or consent to a resolution authorising a purchase contrary to section 78 can be jointly and severally liable to restore the amount paid to the company. Tax treatment of a company buyback can differ significantly from a personal purchase, so both sides should get tax advice before choosing.

Payment terms: paying over time without losing control

Few remaining owners can pay the full price on closing. Common structures include a cash payment at closing with the balance by instalments, payments tied to the company's future profits, or a mix. If you are paying over time, the agreement should cover:

• The schedule and interest rate, and whether early payment is allowed.
• Security for the unpaid balance, such as a pledge of the purchased shares, a general security agreement, or a personal guarantee.
• Default and acceleration, meaning what happens, and how quickly the full balance becomes payable, if a payment is missed.
• Restrictions while money is owing, such as limits on dividends, selling key assets or taking on new debt.

If the company is the buyer and pays by instalments, keep in mind that the solvency test in section 78 is framed around making a payment, so each payment should be checked against it.

Releases: closing the door cleanly

A buyout should end the relationship, not leave loose ends for a later lawsuit. The agreement usually includes:

• Mutual releases of claims between the departing owner, the remaining owner and the company, with any agreed exceptions spelled out.
• Release from personal guarantees. A departing owner will usually want to be released from any personal guarantee given to a bank, landlord or supplier. The lender or landlord has to agree to that release, so start the conversation early.
• Resignations as director and officer, and a clear end to any employment or consulting role.
• Confidentiality and non-solicitation terms, and any non-competition clause, drafted to be reasonable in scope and length.
• Return of company property, passwords, records and client files.

The paperwork after signing

Closing a buyout is not only a cheque and a signature. The company's records must reflect the change:

• Transfer the shares and update the securities register in the minute book.
• Record director resignations. A resignation takes effect when the written resignation is given to the company or its lawyer, or at a later time it specifies (section 128).
• File a notice of change of directors with the BC Registry within 15 days after the change (section 127). The Province's guide to director changes walks through the online filing.
• Update banking authorities, signing officers and account access.

If either owner is married or in a marriage-like relationship, a spouse may have an interest in how the shares are dealt with, particularly if a separation is under way, so it is worth checking that before closing. For future owners, this is a good moment to put a shareholders' agreement in place.

Buying out a co-owner? Get the terms documented properly

Our business purchase and sale lawyers can review your articles and shareholders' agreement, negotiate and draft the buyout agreement, security and releases, and handle the share transfer and corporate filings.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.