Partnership transitions are a critical phase in any business, often bringing complex financial and structural challenges. In this case, three partners – one looking to retire and two remaining, needed a financial solution to ensure a smooth transfer of ownership while protecting their personal and business assets.
Overview:
Partner A was nearing retirement and had offered to sell their share of the pharmacy to Partners B and C. While Partner B was financially prepared, with enough equity in the store to cover the refinance and purchase, Partner C had more financial constraints. Partner C had some equity but was hindered by an undisclosed ATO (Australian Tax Office) debt and limited liquidity. Both remaining partners also had interlocking securities tied to their original purchase of the pharmacy.
The challenge for Allfin was firstly, how could the partners manage the buyout while ensuring that personal and business assets were optimised, and secondly how can we support future financial growth?
Allfin’s solution:
Our team reviewed the entire partnership a strategic solution which consisted of:
- Clearing ATO debt: The key hurdle for Partner C was their ATO debt, which needed to be addressed before they could proceed with the buyout. To navigate this, a second-tier lender was engaged to pay out the ATO debt, ensuring Partner C’s financial obligations were cleared, allowing them to contribute to the buyout.
- Refinancing the pharmacy: The pharmacy’s loan was refinanced to increase the loan-to-value ratio (LVR) to 80%. This move freed up enough capital to buy out Partner A’s share, making the ownership transition possible without placing undue strain on the business.
- Simplifying security mix: Previously, the partners’ homes had been tied up as security for the pharmacy. By refinancing the pharmacy and increasing its gearing, the partners were able to remove their homes from the security mix, leaving the pharmacy as the sole secured asset. This not only simplified their personal finances but also protected their homes from future business risks.
- Optimising individual lending structures: With the new ownership structure in place, each partner’s loan terms were optimised for their respective financial situations. Partner B had an unencumbered home, so they remained on interest-only payments for the commercial loan. This provided them flexibility, enabling them to keep their house available for future investment opportunities. Partner C, now free from the ATO debt, was placed on principal and interest (P&I) payments. This strategy helped them build equity in the pharmacy while also stabilising their financial position over time.
Future protection:
As part of the restructuring, we recommended Partner C take out life insurance. This was a crucial step to ensure that both partners’ interests were protected in case of unforeseen circumstances as well as Partner C’s family. From a partnership perspective, the life insurance coverage ensured that Partner B would be financially safeguarded should Partner C become unable to fulfill their financial obligations to the business.
The Outcome:
This carefully planned financial restructuring enabled the partners to complete the buyout efficiently, allowing Partner A to retire, and positioning both Partner B and Partner C for long-term success. By utilising a combination of refinancing, debt consolidation, and tailored lending structures, the partners now have a business standing on its own as a secured asset, clear loan terms tailored to each partner’s needs, personal assets protected from future business risks, and finally, a roadmap for future investments, particularly for Partner B, who now has an unencumbered home.
Additionally, with life insurance in place, both partners can feel confident in the security of their financial futures.
Contact the Allfin team today to talk about your partnerships.