Introduction
When two business owners decide to part ways, one of the hardest questions is: What’s a fair price for the buyout?
I recently advised two Canadian business owners—clients of mine, one the Seller and the other the Buyer—who each owned 50% of a real estate company. The company owned two rental properties: one multiplex and one single-family residence. Their accountant’s first draft calculation ignored the shareholder loans—money each partner had lent the company. That mistake would have overvalued the company and created an unfair deal.
Here’s the step-by-step approach I used with them. You can apply the same formulas if you ever need to value a company for a partner buyout.
Note: For confidentiality, all numbers in this post have been modified.
Step 1: List the Company’s Assets
Start with everything the company owns. In this case:
- Real estate (market value, agreed by both parties): $2,800,000
- Cash and current assets: $40,000
Formula:Total Assets = Real Estate + Cash
= $2,800,000 + $40,000 = $2,840,000
Step 2: Subtract External Liabilities
Next, deduct what the company owes to outside lenders, like banks.
- Mortgages: $2,250,000
Formula:Net Assets = Total Assets – Mortgages
= $2,840,000 – $2,250,000 = $590,000
Step 3: Subtract Shareholder Loans
This is the step often missed. If the owners lent money to the company, those loans must be repaid before splitting equity.
- Seller loaned: $165,000
- Buyer loaned: $240,000
- Total shareholder loans: $405,000
Formula:Residual Equity = Net Assets – Shareholder Loans
= $590,000 – $405,000 = $185,000
Step 4: Divide the Residual Equity
Now, split what’s left based on ownership. Both partners owned 50%.
Formula:Equity Share per Partner = Residual Equity × Ownership %
= $185,000 × 50% = $92,500 each
Step 5: Add Back the Loan Repayment
Each partner first gets their shareholder loan back. For the Seller:
- Loan repayment: $165,000
- Plus equity share: $92,500
- Total entitlement = $257,500
This means the transaction price of the Seller’s shares (the equity portion) is $92,500, but the total funds the Buyer needs to transfer at closing also include repayment of the Seller’s loan, bringing the total to $257,500.
Step 6: Adjust for Unequal Contributions
The Seller had contributed $75,000 less than the Buyer. In theory, one could apply a negative adjustment to account for this funding gap, ensuring the Buyer isn’t subsidizing the Seller. Under that approach, the Buyer would pay only $182,500 — computed as $165,000 (loan) + $92,500 (equity) − $75,000 (funding gap) = $182,500 (calculated as $257,500 total entitlement – $75,000 funding gap).
However, this adjustment is optional and depends on the partners’ agreement.
The Buyer even considered asking the Seller to add the $75,000 before the sale of shares. But doing so would not have changed the equity: both assets and liabilities would have increased by the same $75,000 amount. At closing, that same $75,000 would have simply been refunded to the Seller as part of the loan repayment. To keep it simple, and because it didn’t change anything at this oint, they decided to ignore the funding gap.
This illustrates how practical decisions between partners can matter just as much as the math.
The Outcome
In this case, the partners ultimately agreed not to adjust for the $75,000 funding gap. That meant the Buyer would provide the Seller with the full $257,500: this included repayment of the Seller’s loan ($165,000) plus the equity value of the shares ($92,500).
This decision reflected their mutual preference to keep the transaction straightforward and avoid additional debate over past contributions.
Lessons You Can Apply
- Pay back debts first. Always subtract mortgages, loans, and shareholder advances before dividing equity.
- Ownership isn’t everything. Two people may own 50% each, but if one invested more, that needs to be considered.
- Use simple formulas.
- Total Assets – Mortgages – Shareholder Loans = Residual Equity
- Residual Equity × Ownership % = Equity Share
- Loan Repayment + Equity Share – Funding Gap = Final Buyout Price
- Document everything. Put loans, repayments, and the final agreement in writing with a lawyer’s help.
Conclusion
A fair buyout isn’t just about dividing assets. It’s about respecting liabilities, recognizing contributions, and applying the math in the right order.
By following these formulas, you can calculate a transparent and defensible buyout price—avoiding conflict and keeping relationships intact.