How to Buy Out a Business Partner in British Columbia

You and a co-owner built a business together, and now one of you wants out. If you are the one staying, you need a clear path: what the share or interest is worth, how it will be paid for, and how to make sure the departing partner is fully out, with no loose ends.

This article walks through the usual steps for a buyout of a partner or shareholder in British Columbia. The right structure depends on your agreements and your tax position, so a lawyer and an accountant should confirm the details before you sign.

This article covers the law of British Columbia.

Start with the agreements you already have

Before you talk price, find the documents that already govern an exit. For a company, that is usually a shareholders' agreement, plus the articles and any directors' or shareholders' resolutions. For a partnership, it is the partnership agreement. These documents may already set out a buy-sell process, a way to value the interest, a right of first refusal, or limits on who can own shares.

If the agreement sets a process, start there, and have a lawyer confirm how it applies to your situation before you change anything. If there is no agreement at all, clear paperwork matters even more.

• Shareholders' agreement or partnership agreement, with all amendments
• Corporate records: articles, share register, minute book, and recent financial statements
• Loan agreements, leases and supplier contracts that name either partner
• Any personal guarantees given to the bank, landlord or suppliers
• Employment or management contracts for the departing partner

Valuation and price

Price is usually the hardest part. A valuation tries to put a number on the business, and then on the departing partner's share of it. Owners sometimes use a formula in their agreement, an independent business valuator, or a negotiated figure.

Whatever method you choose, agree on what is included. Does the price cover cash in the company, inventory, receivables and equipment? Are loans the partner made to the company being repaid separately? Are there debts or tax owing that should reduce the price? Write these points into the purchase agreement so nothing is argued about later.

Payment terms and why tax matters

You can pay the full price at closing or over time. Paying over time eases your cash flow, but it creates risk for your partner, who may ask for security, interest, or a promissory note. From the seller's side, a capital gains reserve lets a seller who is paid over time spread the gain. Most reserves can be claimed over a maximum of four years, so the gain is included over five years, and a nine-year period applies in some cases, such as certain transfers to children.

Tax is a big reason to get advice early. The taxable part of a capital gain is based on an inclusion rate, which the CRA guide gives as one-half. Confirm the current rate with your accountant before you finalize numbers. Not everything in a sale is a capital gain either; for example, recapture of capital cost allowance must be included in income in some asset sales.

The lifetime capital gains exemption may reduce your partner's tax if they are an individual selling qualifying small business corporation shares. The shares must meet tests, including that the corporation is a Canadian-controlled private corporation and that more than 50% of its assets were used in an active business during the 24 months before the sale. No one outside the individual and related persons can have owned the shares in that period.

There are limits. The deduction is the least of four amounts, it is reduced by the cumulative net investment loss, which means Form T936 may be needed, and it can be denied in certain series of transactions. The exemption does not apply where a corporation sells its own assets. The current dollar limit has been subject to changes, so ask your accountant for the figure that applies to your closing date.

The share transfer, releases and guarantees

In a share purchase, the departing shareholder transfers their shares to you or to the company, depending on how the deal is built. The paperwork usually includes a share purchase agreement, share transfer documents, updates to the share register, and resignations as director or officer.

A share sale also affects the practical side of the business. PST does not apply to the sale of shares of a business. In a share sale the corporation that employs your staff stays the same, but how employment rules apply depends on your situation, so it is worth confirming with a lawyer. If the buyout is structured as an asset transfer instead, different rules can apply, so confirm the structure first.

Be careful about transfers between related parties. Where property is transferred to a spouse, common-law partner, a person under 18 or someone not dealing at arm's length, the transferee and transferor can be jointly and severally liable for the transferor's tax, up to the excess of the property's fair market value over what was paid. Special rules apply to transfers under a court order or written separation agreement after a relationship breakdown.

Finally, deal with the exit points. A release is a signed document in which each side gives up claims against the other. Guarantees need separate attention: if your partner personally guaranteed a bank loan or lease, check what those documents say and raise it with the lender or landlord early. How a guarantee is handled after a buyout depends on your situation, so it is worth confirming with a lawyer.

What to do next

• Gather the agreements, financial statements and list of guarantees
• Talk with your accountant about the structure and tax effect for both sides
• Decide how the business will be valued and who will pay for the valuation
• Put the agreed price, payment terms and security in writing before closing
• Ask a lawyer to prepare the purchase agreement, releases and share transfer documents
• Ask lenders, landlords and key suppliers what they need to release the departing partner

A lawyer can review your agreements, flag conflicts between the partners, and make sure the closing documents match the deal you reached.

Frequently asked questions