Structure
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.
Also called partner buyout · buying out a shareholder · company purchase of own shares · share buyback financing · exiting shareholder
The interest is the small half. On a five-year amortising facility the principal is nearly three times it.
| Component | Amount |
|---|---|
| Interest at 6.75% | £337.5k |
| Principal, five-year profile | £1,000k |
| Total debt service | £1,337.5k |
The guide's own worked example: £2m of EBITDA supporting £5m of senior debt at 2.5 times. At an all-in of 6.75% that is £337,500 of first-year interest, and £1,000,000 of principal on a five-year amortising profile, giving first-year debt service of about £1.34m. Illustrative arithmetic, not a quote.
Why this credit reads differently
Because the cash leaves the business, and a lender knows it.
Buying out a departing, passive or retiring shareholder is an ownership shift funded by debt, and it is a different credit from money raised to grow. Money raised for a machine, an acquisition or a working-capital swing stays in the business and does something that helps repay it. Money raised to pay an exiting owner is gone the day it is drawn.
So the lender underwrites the remaining company's existing cash generation rather than a growth plan. There is no upside case to point at, because the transaction produces none. What there is instead is the business as it stands, minus a shareholder, plus a debt.
That framing explains everything else about how these deals get sized and structured, and it is the thing borrowers most often fail to anticipate.
What that does to leverage
It keeps it at the conservative senior end, roughly 2.5 to 3.5 times EBITDA.
A lender funding growth can take some comfort from the plan, because the money is buying something that should generate a return. A lender funding an exit has no such comfort, so the question narrows to what the existing cash flow can carry on a downside case.
That is not a lender being difficult. It is the correct reading of a transaction that increases the fixed obligations of a business without increasing its capacity to meet them.
The practical consequence is that a departing shareholder's expectations and what the company can fund are often some distance apart, and the sooner both parties see the same arithmetic the better the conversation goes.
Two routes, and the choice is usually settled by tax and by who wants to own what afterwards rather than by the funding.
| Route | Machinery involved |
|---|---|
| Company buys and cancels the shares | Part 18 |
| Newco acquires the shares | A group afterwards |
The two structural routes and what each demands. A company purchase of own shares sits under Part 18 of the Companies Act 2006. Which route suits a given situation is a tax and legal question; nothing here is advice.
What the cash flow has to carry
More than the interest, and the repayment is the part that constrains.
Take the worked example. A business with £2m of EBITDA supports £5m of senior debt at two and a half times. At an all-in cost of 6.75%, first-year interest is £337,500. On a five-year amortising profile the annual principal repayment is £1,000,000. Together that is about £1.34m of first-year debt service.
The principal is nearly three times the interest. Borrowers who model the interest and treat the repayment as a detail get this badly wrong, because a buyout facility is repaid rather than merely serviced, and the repayment schedule is what the covenant package tests.
Those figures are illustrative arithmetic at current conventions rather than a quote, but the shape holds: on a five-year profile, roughly two thirds of a £2m EBITDA is committed to debt service in year one.
Route one: the company buys its own shares
The company borrows, buys the departing owner's shares and cancels them, so the continuing shareholders own the same number of shares out of a smaller total.
It is the more direct route and it has statutory machinery attached. A company purchase of own shares sits in Part 18 of the Companies Act 2006, which allows a purchase out of distributable profits, out of the proceeds of a fresh share issue, or, for a private company, out of capital under its own procedure.
That list is the constraint people miss. Borrowing raises cash but creates no distributable profits, so a company with the funding in place and insufficient reserves still cannot complete this way without using one of the other permitted sources.
The out-of-capital route exists for exactly that situation and is used in practice, but it carries a directors' statement, an auditor's report and a statutory timetable, and it needs proper advice from the outset rather than as a late fix.
Route two: a new company acquires the shares
The continuing shareholders form a new company, which borrows and buys the departing owner's shares, leaving a group.
This avoids the Part 18 conditions entirely, because no company is purchasing its own shares. It introduces a group structure instead, with the debt sitting at the new holding company and the trading business beneath it, which raises the ordinary questions about where the security sits and how cash moves up to service the debt.
Which route is right is usually settled by tax and by what the continuing shareholders want to own afterwards rather than by the funding, since both routes fund similarly. The tax treatment of a company purchase of own shares, capital or income, turns on statutory conditions and belongs with a tax adviser.
The point worth making here is only that the choice should be made early. Both routes are fundable; they are not equally easy to switch between once a process has started.
A company cannot simply buy its own shares with borrowed money. The statute names where the money may come from.
| Source | How readily available |
|---|---|
| Out of capital (private only) | Own procedure |
| Proceeds of a fresh share issue | 30–55 on the scale |
| Distributable profits | The usual route |
The three sources Part 18 of the Companies Act 2006 permits for a company purchase of its own shares, ranked by how readily available each is in practice. Out of capital is available to a PRIVATE company only and carries its own procedure. Not legal advice.
Sizing it properly
On the downside case, with the customary covenant headroom of 25 to 30% against the base case intact afterwards.
A buyout is a one-way transaction. Once the departing shareholder is paid there is no unwinding it, and the business carries the resulting debt through whatever the next five years contain. So the sizing question is not what the lender will advance but what the company still services if a customer leaves or margin compresses.
Covenants are tested quarterly on trailing twelve-month numbers, so a bad quarter arrives in the covenant calculation quickly. Headroom is what absorbs that, and a buyout structured to the maximum with thin headroom converts an ordinary trading wobble into a lender conversation.
Where the arithmetic is tight, taking slightly longer to repay is usually a better answer than taking slightly more debt. A six or seven-year profile, where a lender will offer one, materially reduces the annual burden without increasing the quantum.
When the stake is bigger than the cash can carry
Which is common, and there are three routes that work.
Deferred consideration, where part of the price is paid over time out of future cash flow. This is the most useful of the three, because it converts a funding problem into a timing one and the departing shareholder is usually the party best placed to carry that risk.
A staged purchase, where the stake is bought in tranches over several years, with the departing shareholder remaining a shareholder in the meantime. It requires a clear agreement about governance and valuation for the later tranches, and those terms deserve as much attention as the price.
And a minority equity partner, where an outside investor funds part of the purchase in exchange for a stake. It solves the funding entirely and changes who you are in business with, which is a larger decision than the transaction that prompted it.
What does not work is stretching the debt to cover the whole price when the cash flow does not support it. That is the version of this transaction that damages the business the buyout was meant to secure.
The conversation to have first
Between the shareholders, about what the business can fund, before anyone agrees a price.
The most common failure in these transactions is a price agreed between shareholders on a valuation basis, followed by the discovery that no lender will fund it. That sequence poisons the relationship, because the continuing shareholders then appear to be renegotiating rather than reporting a constraint.
Getting an indicative view of the fundable quantum first costs little and reframes the discussion usefully: not what the stake is worth in the abstract, but what the company can pay for it and over what period. Those are different questions and only the second one has to be answered for the transaction to happen.
It also makes deferred consideration a natural part of the opening conversation rather than a concession extracted later, which is a considerably better place to start.
Common questions
How do I fund buying out a business partner?
Usually with senior debt at the conservative end of the range, around 2.5 to 3.5 times EBITDA. The cash leaves the business to pay the exiting owner, so a lender underwrites the remaining company's existing cash generation rather than a growth plan, which keeps the leverage lower than a growth facility would carry.
Why will a lender advance less for a buyout than for growth?
Because the money does not stay in the business. Growth funding buys something that should help repay it; buyout funding is gone the day it is drawn. The transaction increases fixed obligations without increasing capacity, so the question narrows to what existing cash flow carries on a downside case.
What will the debt service come to?
More than the interest. On the worked example, £2m of EBITDA supports £5m at 2.5 times; interest at 6.75% is £337,500 and principal on a five-year profile is £1,000,000, so first-year debt service is about £1.34m. The principal is nearly three times the interest, and modelling only the interest is the common error.
What are the two routes?
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. Both fund similarly; the choice is usually settled by tax and by what the continuing shareholders want to own afterwards.
Can the company just borrow and buy its own shares?
Not straightforwardly. Part 18 permits a purchase out of distributable profits, out of the proceeds of a fresh share issue, or, for a private company, out of capital under its own procedure. Borrowing raises cash but creates no distributable profits, so funding alone does not satisfy the statute.
What is the tax treatment?
The treatment of a company purchase of own shares, capital or income, turns on statutory conditions and belongs with a tax adviser. It is worth resolving early because it frequently decides which of the two routes is used, and nothing here is tax advice.
What if the stake costs more than we can borrow?
Deferred consideration, a staged purchase over several years, or a minority equity partner. Deferred consideration is usually the most useful, because it turns a funding problem into a timing one and the departing shareholder is often best placed to carry that. Stretching the debt to cover the whole price is the version that damages the business.
What should we do before agreeing a price?
Get an indicative view of what is fundable. A price agreed between shareholders and then found to be unfundable poisons the relationship, because the continuing shareholders look like they are renegotiating rather than reporting a constraint. It also makes deferred consideration part of the opening conversation rather than a late concession.
The full treatment sits in the guide: shareholder and partner buyout financing.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.