Most disputes between business owners do not start with a disagreement. They start with a document that never answered the question. Bringing a new owner into an established business can be a significant step: part of a succession plan, a way to retain a key executive, a source of growth capital, or a pathway for an existing owner to step back over time. Whatever the reason, the ownership structure and commercial terms need to be right before the transaction moves too far.
For most established businesses, the starting point is an existing company or unit trust. The question is rarely whether an entirely new structure is required. It is whether the current structure can accommodate the incoming owner while protecting the value already created and supporting the next stage of growth.
Start With the Commercial Deal, Not the Percentage
Before working through the legal and tax detail, everyone needs to be clear on what is actually being proposed.
Is the incoming owner buying an interest from the existing owners, or is new equity being issued with the funds going into the business? Are they investing cash, contributing expertise, or earning equity over time? Will they be actively involved in management or joining as an investor, and what level of control and decision-making authority comes with the interest? Will their ownership grow over time, and does the transaction form part of a broader succession or exit strategy?
Answer these before ownership percentages are finalised.
A minority interest issued to a key executive under a long-term succession plan is very different from the same interest acquired by an external investor. The percentage may be identical, but the valuation, funding arrangements, governance rights and exit terms will often need to be very different.
Review the Existing Group Structure First
Larger businesses often operate through more than one entity. A group may include a trading company, an asset-holding entity, a service entity, an intellectual property entity, or separate entities for different divisions.
Before introducing a new owner, identify exactly what they are acquiring an interest in. That may be:
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The main trading business, or one particular company or division within the group
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Intellectual property, real property or other significant assets
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The whole business group
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Future growth only, with existing owners retaining the value and assets accumulated before the transaction
A structure that worked well when the business was established is not automatically ready for another owner. Sometimes the new owner only needs an interest in the main operating company. In other cases, the group needs to be reorganised so the transaction reflects the intended commercial deal and does not unintentionally transfer an interest in assets meant to stay with the existing owners.
Company or Unit Trust: Which Structure Suits a New Owner?
For an established privately owned business, the relevant structure is usually a company or, in some cases, a unit trust. Partnerships and discretionary trusts can be appropriate in certain circumstances, but they are less likely to be the primary structure in the sale or purchase of an established business.
Company
A company generally provides a clear and familiar framework for introducing a new owner. Ownership is represented by shares, allowing the parties to define each shareholder’s percentage, their voting and decision-making rights, dividend entitlements and rights to capital if the business is sold. The documents can also set restrictions on transferring shares, the process for issuing further shares, and the pathway for future investment or ownership changes. Where the parties need different voting, dividend or capital rights, separate classes of shares may be worth considering.
Unit Trust
A unit trust may suit a business or investment already held through a trust, where each owner’s interest needs to be fixed and clearly identifiable. Each owner holds units representing their proportionate interest, which can work well where ownership percentages are fixed, different parties are contributing capital, each owner wants to hold their interest through their own entity, or future unit issues are contemplated.
Review the trust deed carefully before introducing a new unitholder. It should properly deal with the issue and transfer of units, voting rights, distributions, changes in control, and the rights of existing and future owners. A unitholders agreement will usually also be needed to document the broader commercial arrangement.
Not sure your current structure can carry another owner? Talk to the Hoffman Kelly team before you agree terms.
How Is the New Owner Coming In?
The method chosen can materially change the commercial and tax outcome.
1. Buying an Interest From an Existing Owner
The incoming owner purchases shares or units directly from an existing owner, so the purchase price goes to the selling owner rather than into the business. This may create Capital Gains Tax consequences for the seller and will generally require an agreed valuation of the interest being transferred. The parties also need to consider whether the interest carries control, whether it is a minority holding, and whether any transfer restrictions affect its value.
2. Investing New Capital Into the Business
The company or unit trust issues new shares or units to the incoming owner. The investment stays in the business and can fund expansion, acquisitions, technology or working capital. Issuing new equity will usually dilute the existing owners, so the issue price and resulting percentages need to be commercially supportable and consistent with the agreed valuation.
3. Earning Equity Over Time
A key executive or future successor earns an ownership interest over an agreed period. This aligns ownership with continued service, performance or agreed milestones, but it needs careful documentation.
The parties should agree when the equity is earned or issued, whether the recipient must pay for it, and how performance or service conditions are measured. They should also settle what happens if the person leaves early, whether unearned equity lapses, how vested equity is valued on exit, and whether a tax liability could arise before the recipient receives any cash.
Valuation Is More Than Agreeing on a Number
For an established business, valuation usually sits at the centre of the transaction.
The owners should be clear about which entities, operations and assets are included, and whether surplus assets or excess cash form part of the deal. They need to agree how business debt is treated, whether the valuation is based on historical or maintainable earnings, and how one-off income and expenses are adjusted. Beyond the mechanics, the harder questions are whether recent growth is sustainable, whether the incoming owner is paying for goodwill created before they joined, and whether a minority or control adjustment is appropriate.
The valuation methodology should align with the legal documents and the commercial deal. Where parties work from different assumptions, disagreements arise even when everyone believes they agreed on the same headline number.
Governance Becomes More Important as Ownership Expands
Introducing another owner changes more than the share register. It changes how the business is governed.
The owners should agree on board composition and the appointment and removal of directors, along with management roles and day-to-day authority. They also need a framework for approving annual budgets and business plans, setting limits on borrowing and capital expenditure, and dealing with requirements for additional owner funding. Finally, the documents should cover dividend or distribution policies, financial reporting and access to information, related-party transactions and conflicts of interest, and which decisions require special or unanimous approval.
The framework needs balance: unanimous approval for routine matters slows the business down, while unrestricted authority for one owner over major decisions creates unnecessary risk.
Why a Shareholders or Unitholders Agreement Is Essential
The company constitution or trust deed provides the legal framework, but it rarely deals with every commercial issue between the owners.
Depending on the structure, a shareholders agreement or unitholders agreement should address:
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Running the business: roles, responsibilities, decision-making authority and board representation
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Money: profit distribution, dividend policy and future capital requirements
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Transfers: restrictions on transferring an interest, rights of first refusal, valuation methodology and compulsory transfer events
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Protection: deadlock procedures, restraint and confidentiality obligations
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Exit: retirement, death, disability and incapacity, and what happens if an owner stops working in the business
Where an owner is also an employee or executive, the agreement should explain what happens to their equity if their employment ends. That often means good-leaver and bad-leaver provisions, particularly where equity formed part of remuneration or a succession pathway.
These conversations can feel uncomfortable while everyone is aligned and optimistic. That is exactly when to have them.
Consider the Tax Before the Transaction, Not After
Introducing a new owner can have tax consequences for the existing owners, the incoming owner and the business group. Depending on the transaction, you may need to consider:
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Capital Gains Tax on the sale or transfer of shares or units, and whether the small business CGT concessions or a restructure rollover are available
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The tax treatment of newly issued equity, including employee share scheme implications and equity provided in return for services
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Duty and other transaction costs, and Division 7A where private company funding is involved
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The effect on carried-forward tax losses and franking credits, given the change to ownership and control tests
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Existing finance arrangements, guarantees and commercial contracts
Timing matters. Once documents are signed or ownership changes, some restructuring and tax-planning opportunities are no longer available. Tax advice should be worked through alongside the commercial and legal terms, not after the transaction is done.
Plan for Exit and Succession From the Start
The documents should explain how someone leaves the business, not just how they enter it.
Cover the owner who retires or stops working in the business, the owner who wants to sell or receives an offer from an external buyer, and the owner who cannot meet a funding commitment. Then cover the events nobody plans for: serious illness or incapacity, death, insolvency, or a relationship breakdown that affects ownership.
Also consider how a future buyout would be funded. Insurance, external finance or staged payment arrangements may be needed. Without a practical funding mechanism, a compulsory buyout clause can look effective on paper and be very difficult to implement when it is actually needed.
Frequently Asked Questions
Do I need a shareholders agreement if we are family?
Yes. A constitution sets the legal framework but does not resolve commercial questions such as dividend policy, exit terms or what happens if one family member stops working in the business. Family arrangements often face the most difficult disputes because the terms were never documented.
Should I use a company or a unit trust to bring in a partner?
It depends on the existing structure, the assets involved and each owner’s own tax position. A company is usually the simpler framework for multiple owners. A unit trust can suit where the business is already held in trust and each owner wants a fixed, identifiable interest held through their own entity.
Will bringing in a business partner trigger CGT?
It can. Selling an interest to an incoming owner is generally a CGT event for the seller. Issuing new equity works differently again. The small business CGT concessions and restructure rollovers may be available, but eligibility needs to be checked before the transaction.
How much of my business should I offer a new partner?
There is no standard percentage. The right answer depends on what is being contributed, the agreed valuation, the level of control intended, and whether the interest will grow over time. Settle the commercial deal first; the percentage follows from it.
Before signing a heads of agreement, issuing or transferring shares or units, or announcing the new ownership arrangement, speak with your accounting and legal advisers, since once terms are documented, many structuring and tax-planning options close off.
Considering bringing a new owner into your business? Speak with the Hoffman Kelly team before the transaction is agreed. We can assess the structure, tax implications and commercial issues before anything is signed, while you still have every option open.