Seller Retained Equity Negotiation Checklist for Australian Business Buyers

The Complete Seller Retained Equity Negotiation Checklist

Section 1: Initial Evaluation

Before agreeing to the structure in principle, confirm the following.

• Seller motivation understood. You've asked directly why the seller wants to retain equity — and the answer is credible. Tax deferral, upside participation, and transition support are legitimate. Inability to find a full-price buyer is a flag.
• Retention percentage is reasonable. Minority stakes of 10% to 30% are workable. A seller wanting to retain more than 40% is not a partial exit — it's a co-purchase, which requires a completely different governance structure.
• Retention period is defined. The period for which the seller holds their stake is specified — typically 18 to 36 months. Open-ended arrangements without a buyout trigger should be rejected or heavily negotiated.
• Tax advice obtained. You've engaged a tax adviser who works in business M&A (not a generalist accountant) to model the CGT and structure implications for both parties. This step affects the economics of the deal.
• Not a substitute for proper DD. Seller retained equity does not reduce your due diligence obligations. You still need to verify the financials, check customer concentration, inspect plant and equipment, and review all contracts. The seller keeping equity means they have skin in the game — it doesn't mean the numbers are clean.
• Compared against alternatives. You've reviewed vendor finance, earn-out, and full-price bank-financed structures against the retained equity proposal. You have a reason for choosing this structure over the alternatives.

Section 2: Price and Equity Split

• Agreed purchase price is documented for the percentage being acquired at settlement — not a vague formula.
• Valuation methodology agreed for the retained stake. The seller's retained equity is valued at the same per-share price as the stake you're acquiring. Any attempt to value the retained stake differently (e.g., at a premium because it includes certain rights) should be pushed back on.
• Minority discount considered. A minority stake in a private company is worth less per share than a controlling interest — this is a standard concept in business valuation. If the seller is retaining 20%, they should accept that minority discount in the formula for the future buyout. Make sure the buyout mechanism reflects this.
• Working capital treatment agreed. The working capital adjustment process applies to the whole business, not just the majority stake. Confirm the working capital peg and the adjustment mechanism in the sale and purchase agreement.

Section 3: Shareholder Agreement — Core Provisions

This is the document most buyers underinvest in. Have a commercial lawyer with M&A experience (not a generalist) draft this, not adapt a startup-focused template.

• Decision-making rights clearly mapped. The agreement specifies:
  • Decisions the majority shareholder (you) can make unilaterally — day-to-day operations, staffing decisions, pricing, supplier selection.
  • Decisions requiring minority shareholder consent — material debt above a defined threshold, sale of major assets, changes to capital structure, changes to dividends policy.
  • Decisions requiring unanimous approval — sale of the whole business, winding up, issuing new shares.
• No blocking rights on ordinary operations. The seller's minority stake should not give them veto rights over operational decisions. If the draft agreement includes provisions like "material changes to the business" or "significant operational decisions" as consent items, push for precise definitions — vague terms create disputes.
• Information rights defined. The seller is entitled to see the financial accounts and relevant operational information. What they receive, at what frequency, and in what format should be documented. Monthly management accounts or quarterly financials is standard.
• Dividend policy documented. What is the dividend policy during the retention period? Many buyer-side structures include a no-dividend (or minimal dividend) policy during the buyout period — the seller's return comes entirely through the buyout, not through distributions. If dividends will be paid, specify the percentage of distributable profit and the timing.
• Salary and drawings provisions. If you will be working in the business, your market-rate remuneration is documented and cannot be challenged by the seller as a way to reduce distributable profit.

Section 4: Buyout Mechanism

This section is where most seller retained equity disputes originate. Nail it down upfront.

• Call option documented. You have a call option — the right, but not the obligation, to purchase the seller's remaining stake — with:
  • A defined exercise window (e.g., exercisable any time after 18 months, or within a 6-month window starting at 24 months)
  • A formula for the exercise price (see below)
  • A defined process for giving notice and completing the transfer
• Buyout formula is precise. The exercise price formula should specify:
  • The earnings measure (EBITDA or SDE — defined precisely, including which add-backs are permitted and which aren't)
  • The multiple to apply — agreed upfront, not to be negotiated at exercise
  • The reference period for earnings (typically trailing 12 months, or average of last 2 years)
  • Who conducts the calculation (typically the company's accountant, with a dispute mechanism if the seller disagrees)
• Minority discount applied in formula. The buyout price applies a minority discount — typically 15% to 25% — to reflect that a minority stake in a private company carries less value per share than a controlling interest.
• Put option reviewed (seller's right to force you to buy their shares). If the seller has a put option, confirm:
  • The earliest date it can be exercised
  • Whether the same formula applies as the call option
  • Your financing plan for this scenario — can you actually fund the buyout if required?
• Drag-along rights included. If you sell the whole business in the future, the seller's minority stake can be dragged along — they cannot block a whole-business sale. This is standard; push back if the seller resists.
• Tag-along rights acknowledged. If you sell your majority stake to a third party, the seller can require that party to buy their minority stake on the same terms. This is reasonable and protects the seller from being stuck with an unknown co-investor.
• Transfer restrictions documented. Neither party can transfer their shares without the other's consent (subject to the drag-along and tag-along provisions). The seller cannot sell their minority stake to a competitor or an unknown third party without your approval.

Section 5: Non-Compete and Restraint Provisions

• Restraint of trade applies to the seller regardless of retained equity. The seller retaining a minority stake does not exempt them from a non-compete obligation. Make sure the sale and purchase agreement includes:
  • A defined restraint period (typically 2 to 3 years from settlement)
  • A defined geographic area
  • A defined scope of activity (including not soliciting key staff or customers)
• Restraint survives the equity exit. The restraint period runs from settlement, not from the date the seller exits the equity structure. If the seller retains equity for 24 months and the restraint is 2 years, the restraint may have expired by the time the equity is transferred. Consider a longer restraint or one that runs from the date of equity exit.
• No advisory or consulting carveout that undermines the restraint. Some sellers request a carveout to allow them to "consult" in the industry. Be specific about what this permits and what it excludes.

Section 6: Tax and Structure

• CGT treatment confirmed for both parties at settlement and at the future buyout. The seller's initial payment and the future equity transfer each trigger separate CGT events. Your tax adviser should have modelled both.
• Structure for holding the retained equity confirmed. Is the seller holding shares in the operating company directly, through a trust, or through a holding company? This affects the tax treatment of the future buyout and should be agreed upfront.
• Stamp duty position reviewed. In most Australian states, stamp duty applies to share transfers. Confirm the duty position on both the initial acquisition and the future buyout of the seller's retained stake with a tax adviser familiar with your state's rules.
• Division 7A risk reviewed (if the seller is a company or trust). Loans or distributions to related parties in a company structure can trigger Division 7A issues. If the retained equity is held through a trust or company, your adviser should flag any Division 7A exposure.

Section 7: Documentation Checklist

Before settlement, confirm all of the following documents are executed:

• Sale and purchase agreement — executed, with retained equity provisions reflected
• Shareholders' agreement — executed by all parties, not a post-settlement promise
• Share register — updated to reflect the agreed ownership split from day one of settlement
• Constitution (if a company) — reviewed against the shareholders' agreement for any conflicts
• Option deed (if the call/put option is separate from the shareholders' agreement) — executed
• Services agreement (if the seller is staying on operationally) — separate from equity rights
• Non-disclosure agreement — if not already embedded in the SPA, a standalone NDA for any ongoing information sharing

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Related resources:

• Earn-out Negotiation Checklist — for when the seller wants deferred payments tied to performance rather than retained equity
• Deal Structure Comparison Framework — side-by-side comparison of vendor finance, earn-outs, retained equity, and bank-financed acquisitions

This checklist covers Module 6 of the Playbook. For the full article on how seller retained equity works in Australian business sales, including real examples and negotiation tactics, see the seller retained equity guide.