Buying out a shareholder or partner. How the exit gets funded.
In short
Buying out a departing, passive or retiring shareholder or partner is an ownership shift funded by debt, and it is a different credit from money raised to grow. The cash leaves the business to pay the exiting owner, so the lender underwrites the remaining company's existing cash generation rather than a growth plan, which keeps leverage at the conservative senior end of roughly 2.5 to 3.5 times EBITDA. It is built one of two ways: the company borrows to buy and cancel the departing owner's shares under Part 18 of the Companies Act 2006, or a new company owned by the continuing shareholders borrows to acquire them. How much the business can support is set by the cash it already generates on a downside case, with covenant headroom of 25 to 30%. The tax treatment of a company purchase of own shares, capital or income, turns on statutory conditions and belongs with a tax adviser. Where the exiting stake is larger than the cash can carry, a staged purchase, a minority equity partner or a junior loan behind the senior debt can fill the gap, and so can deferred consideration where the continuing owners or a new holding company buy the shares. A company buying back its own shares must pay for them on purchase, and a staged buyback needs tax advice so the seller keeps capital treatment.
Written by Gregory Elgunov, Managing Director · Last reviewed 25 September 2026
Buying out a departing, passive or retiring shareholder is an ownership shift funded by debt. The cash leaves the business, paid to the exiting owner, and the company carries the borrowing against the same trade it ran the day before, so the lender’s question is narrow and hard: can the business, as it stands, service the debt out of the cash it already generates?
Written for the borrower’s side of the table, the continuing owners raising the money. This is general guidance, not advice on your specific buyout, and it is not tax advice. It sits alongside the shorter answers in our working guide.
The money leaves the business, so the lender underwrites the company that stays.
When a company borrows to grow, the lender underwrites a plan: new capacity, acquired earnings, the return the spending should produce. A shareholder buyout funds a payment out instead, to a retiring founder, a passive family shareholder who wants liquidity, an estate that needs settling or a partner who is leaving, and the company keeps the same customers, margins and cash flows with debt now against them. The continuing owners borrow against the company instead of writing a personal cheque the size of the stake, and with no equity backer arriving and no new revenue line to grow into the leverage, the deal sits at the conservative end of what the debt market will do.
In a dividend recap the owners borrow to pay themselves a distribution and keep every share; in a buyout an owner leaves and their shares are retired or transferred. Only the buyout changes the cap table, and that drives the structure and the tax that follow.
Either the company buys its own shares, or a new company buys them.
A shareholder buyout is usually built one of two ways. In a company purchase of own shares, the trading company borrows, buys the leaving owner’s shares and cancels them, so the continuing shareholders’ percentages rise without any of them funding the purchase personally. Part 18 of the Companies Act 2006 allows it only out of distributable profits, the proceeds of a fresh share issue or, for a private company, capital under a statutory solvency procedure. Companies Act 2006, Part 18. Borrowing raises the cash but creates no distributable profits, so the reserves have to be there already. In the other, the continuing shareholders exchange their shares for shares in a new company, which borrows and buys the departing owner’s shares, so the trading company becomes its wholly owned subsidiary; the table compares the two.
The two routes to buying out a shareholder.
| Row | The company buys back its shares | A new holding company buys them |
|---|---|---|
| Who borrows | The trading company itself | The new company, owned by the continuing shareholders |
| How the price is paid | In full on purchase, as the Companies Act requires; to spread the cost, buy back in stages, sized with the tax adviser so the seller keeps capital treatment | At completion, or partly later as deferred consideration |
| What the lender underwrites | The trading company’s own cash flow, once the reserves allow the purchase | The trading company’s cash flow, pushed up to the new company to service its debt, with intra-group security |
| Tax to flag | The seller’s receipt is taxed as capital or as income, depending on conditions in the Corporation Tax Act 2010; a staged buyback can fail them while the seller still holds a large stake. Stamp duty is 0.5% of the price | A sale to a company the continuing owners control can fall within the anti-avoidance rules on transactions in securities, so advance clearance is usually sought before the route is chosen. Stamp duty is 0.5% of the price |
| When it fits | The reserves allow it, and the continuing owners are content for their percentages to rise pro rata | The reserves will not support a buyback, part of the price is to be paid later, the owners want to reset their proportions, or an outside minority investor is coming in |
The payment is where the two differ most. A company buying back its own shares must pay for them on purchase, unless a private company is buying them for an employees’ share scheme. Companies Act 2006, section 691. On the buyback route the cost is therefore spread by buying back in stages, but staging carries a tax cost of its own: HMRC counts the shares a seller still legally holds after each stage, including those not yet bought, when it tests whether they have ceased to be connected with the company, so a large stake left in can cost the seller capital treatment. A new holding company can instead pay part of the price later as deferred consideration. The newco route has more moving parts, a share purchase agreement, a group structure and intra-group security, but it is flexible where the buyback is rigid.
A partner leaving a professional firm or an LLP is the same idea without the share register: the firm borrows to pay out the retiring partner’s capital account and services the debt from the fees the remaining partners go on earning. Settle the route with your accountant and solicitor before the debt is arranged, because it changes the borrower, the security and the documents.
As much as the steady cash flow can service on a downside case.
A company buying out a shareholder can borrow only what its existing cash generation will service, because no new earnings arrive to help. On senior cash-flow terms a clearing or challenger bank will typically lend around 2.5 to 3.5 times EBITDA to a solid lower-mid-market business; a private-credit fund can stretch to 4 to 4.5 times, occasionally to five for a strong sponsor-backed credit, at a margin of SONIA plus 550 to 800 basis points and often at an original issue discount of 98 to 99. With no growth catalyst the deal usually belongs at the senior end.
As an illustration at September 2026 rates, not a quote, a business generating £2m of EBITDA and converting most of it to cash supports about £5m of senior debt at roughly 2.5 times, priced at a bank all-in near 6.75%: a 3% margin over a reference rate anchored to SONIA at 3.73% on 22 September 2026 and a Bank Rate of 3.75%, held at the Bank of England’s September meeting. Bank of England, Bank Rate. First-year interest runs about £337,500 and a five-year amortising profile adds roughly £1m of principal a year, so debt service starts near £1.34m against £2m of EBITDA. That is cover, but not much, which is why the amount is sized on the downside.
Cash conversion moves the answer as much as the multiple, and the covenant package needs room, customarily 25 to 30% of headroom against the base case, with an arrangement fee near 1% budgeted into the cost. The gap between what the market will extend and what the business should take is the judgement our guide to how much your business can borrow works through.
The seller’s receipt is taxed as capital or as income, and the conditions are specialist ground.
Whether a departing shareholder’s proceeds are taxed as a capital gain or as an income distribution turns on statutory conditions, and it is among the first things to settle with a tax adviser. For an unquoted trading company, capital treatment, which can bring the sale within capital gains tax and potentially a relief, is available on a company purchase of own shares only where conditions in the Corporation Tax Act 2010 are met. They test matters such as the purchase benefiting the trade, a minimum period of ownership, a substantial reduction in the seller’s interest, and the seller ceasing to be connected with the company. Advance clearance can be sought from HMRC. Miss a condition and the payment, beyond the capital originally subscribed for the shares, is taxed as an income distribution, which changes the seller’s net materially and can change the price they will accept.
The outcome shapes the structure and the timetable, so price it in from the start. We do not give tax advice; the seller and the continuing owners each need their own tax and legal advisers on the conditions, the reserves and the clearances, and our part is the debt.
No. One buys out an owner; the other installs a team with a plan.
A shareholder or partner buyout removes one owner and leaves the rest in place. An MBO is a change of control, usually with a value-creation plan and often an equity backer, so the lender underwrites the team and the plan as much as the trade and can stretch the leverage, with a sponsor’s fund able to inject capital if a covenant tightens.
A shareholder buyout has none of that behind it, so the lender underwrites the existing cash generation conservatively. The mechanics overlap, with senior debt sized on cash flow, a debenture over the company and maintenance covenants tested quarterly, but a buyout usually carries less debt than a sponsor-backed MBO of the same company would.
The two shade into each other where the exiting owner holds a large stake and the continuing owners are, in substance, buying the whole business. The deal then needs the MBO’s tools: an equity partner, or vendor paper, which needs a new holding company or the continuing owners themselves to buy the shares. At that point the MBO guide is the better map.
When the exiting stake is bigger than the cash can safely carry.
Stop short of funding the whole buyout with debt when the departing owner’s stake is larger than the company can service at a prudent multiple. Over-gearing to buy out an owner in full is a common and expensive mistake, because the continuing owners carry the debt once the departing one is paid.
Deferred consideration lets the exiting owner be paid over time out of the same cash flow, the shareholder-buyout equivalent of vendor paper, but it works only where the continuing owners or a new holding company buy the shares. A company buying back its own shares must pay for them on purchase. Companies Act 2006, section 691. On that route the cost is spread by buying back in stages instead, each stage paid for when its shares are bought and sized with the tax adviser first, so the seller keeps capital treatment.
A staged purchase takes a first slice now and the balance in a year or two, once the first tranche’s debt has amortised and capacity has rebuilt. A minority equity investor can fund the part the debt cannot reach, at the cost of some dilution. Where the continuing owners would rather service a dearer loan than admit a new shareholder, a junior layer behind the senior debt can fund the gap, at the price our guide to mezzanine versus preferred equity sets out. And sometimes the answer is to wait, since a year of clean trading and a little deleveraging widens what the business can borrow.
We will tell you what the business can carry, and how to fund the rest.
If you are working out how to buy out a shareholder or a partner, the useful first conversation is how much debt the business can prudently carry against its own cash, which structure fits, and how a staged purchase, an equity partner or, where the structure permits it, deferred consideration should fill anything the debt cannot reach. It is confidential and costs nothing. We run the whole market against itself, bank and fund, size the facility on the downside case, work with your tax and legal advisers on the structure, and say plainly when the honest answer is less debt, a staged purchase, or waiting a year. See how a mandate runs in how we work, or the full range of what we advise on in our services.
The terms in this guide
Each is defined in full in the library, with the levels and conventions that apply at £3-15m.
- Shareholder buyout
Buying out a departing shareholder is an ownership shift funded by debt. The cash leaves the business, so a lender underwrites the remaining company's existing cash generation rather than a growth plan, which keeps leverage at the conservative end.