Funding Buyouts Without Bank Loans: Lessons from Private Takeovers

If banks won’t lend and a minority owner won’t budge, how do you close the gap?

For business successors trying to buy a minority owner out, relying solely on bank loans is risky—higher rates, tighter covenants, and small-business credit limits can stall a deal. In 2024–2025 the market showed an unmistakable trend: buyers who combined creative financing with strategic partners closed deals faster and with fewer concessions. The high-profile, all-cash take-private of Titanium Transportation—an offer at CAD$2.22 per share, roughly a 41% premium over the prior trading price—offers a practical model: an investor group led by an existing significant shareholder used capital and structural design to effect a minority squeeze-out without a bank lactation. That deal illustrates the routes successors can take when bank debt is not the answer.

Quick takeaway: three practical non-bank paths to fund a minority buyout

• Investor groups / private equity / family office capital: combine outside equity or private credit to fund an upfront purchase (all-cash or mostly cash) and roll some equity by the buyer.
• Seller financing (promissory notes): the seller accepts a note secured by the business with negotiated interest, amortization and default protections.
• Earnouts and contingent consideration: structure pay-as-you-go compensation tied to measurable performance to reduce upfront cash needs.

The Titanium example: what to learn from an all-cash takeover

Titanium Transportation’s 2024–2025 going-private bid—led by TTNM Management Acquisition Co. Ltd. and Trunkeast Investments—paid an all-cash price at a material premium to public trading levels. Key lessons for successors:

• Leverage concentrated insider capital: Trunkeast was already a significant shareholder. Existing insiders or affiliated investor groups can provide capital faster and accept rollover equity.
• Premiums unlock cooperation: offering a convincing premium reduces shareholder resistance and the risk of dissenters invoking appraisal rights.
• Clean mechanics reduce friction: an all-cash bid avoids complicated earnout disputes but requires capital partners—family offices, private equity, or private credit providers—to step in.

"If you can align a motivated investor group or structure a credible seller note, you can achieve the economic result of an all-cash buyout without a traditional bank loan."

Why bank reluctance has pushed buyers toward alternatives (2025–2026 context)

Heading into 2026, several market developments made non-bank solutions more attractive for small and medium-size buyouts:

• Tighter bank underwriting and higher policy rates: banks have higher constraints on CRE and sponsor-less deals post-rate normalization.
• Growth of private credit and family-office direct deals: non-bank lenders and family offices expanded allocations to direct lending and control equity in 2025, offering flexible mezzanine and equity capital.
• More available dry powder in private markets: sponsors are seeking control investments at smaller sizes, opening doors for successor-led transactions.

Alternative #1 — Investor groups, private equity, and family offices

What this looks like

Instead of a single bank loan, you assemble a capital stack: equity from a private investor (family office, private equity, or a syndicate of accredited investors) plus subordinated private credit or mezzanine financing. The investor group either buys out the minority or provides upfront cash to the successor who then buys the shares.

When to use it

• When you need cash upfront and can offer investors upside via equity rollover or control.
• When the business is scalable and attractive to investors seeking control-oriented returns.

Negotiation and structuring tips

1. Prepare a short investor packet: 12–15 slides showing historic cash flows, growth drivers, management plan, and exit thesis.
2. Offer a rollover: buyers who roll 10–30% of their equity align incentives with investors and reduce cash needs.
3. Price the investor return profile: aim for a realistic IRR and exit roadmap—3–5 year horizon for family offices, 3–7 years for PE.
4. Negotiate governance: investors will require protective covenants and board seats—limit day-to-day interference via a defined management agreement.

Alternative #2 — Seller financing (the promissory-note route)

What is seller financing?

Seller financing means the selling minority owner accepts a promissory note in lieu of full cash at closing. The note can be secured by the business assets, personal guarantees, or subordinated to new investor liens. In the U.S., seller-financed deals often qualify as installment sales under IRC Section 453 (consult a tax advisor for specifics).

Why sellers accept notes

• Tax deferral and deferred capital gains recognition (tax rules vary by jurisdiction).
• Higher gross proceeds if the buyer cannot provide full cash without distortive financing.
• Opportunity to share in upside via warrants or equity kicker.

Practical seller-note terms (typical ranges)

• Tenor: 3–7 years (shorter tenors for higher single-payment security).
• Interest rate: market-plus (often prime + 2–6% or a fixed rate between 6–12% depending on risk).
• Amortization: interest-only with balloon, or straight amortizing; annual or quarterly payments.
• Security: UCC-1 filing, personal guarantees, lien on business assets.
• Default provisions: acceleration, cross-default with other financing, cure periods.

Drafting checklist for seller notes

• Clear definition of events of default and remedies.
• Inter-creditor agreement if other lenders are involved.
• Financial covenants and reporting obligations if required.
• Prepayment penalties or make-whole language to protect seller value.
• Tax gross-up provisions and indemnities for withheld taxes.

Alternative #3 — Earnouts and contingent consideration

What an earnout buys you

Earnouts reduce upfront cash by tying part of the purchase price to future performance metrics—revenue, EBITDA, customer retention, or gross margin. This is especially useful when valuation gaps exist between buyer and seller expectations.

Design principles for workable earnouts

1. Pick objective, auditable metrics: revenue or gross profit with clear accounting rules reduces disputes.
2. Limit earnout duration: 1–3 years is common; beyond that you risk operational drift and measurement disputes.
3. Protect management continuity: require seller cooperation and outline roles—avoid putting the earnout at risk by removing key personnel.
4. Include caps and floors: cap the total payout and set minimum thresholds to avoid open-ended liabilities.

Common earnout structures

• Fixed schedule: X% of excess EBITDA above baseline annually for Y years.
• Step-up payment: incremental payments if revenue milestones are hit.
• Hybrid: partial cash up-front + seller note + earnout.

Combining tools: the hybrid approach

Real-world buyouts rarely rely on a single instrument. A practical successor financing stack could look like this:

• Equity from a family office (30% of purchase price)
• Seller note (40% of purchase price, 5-year amortization)
• Earnout (up to 20% of purchase price over 2 years)
• Small private mezzanine loan or revenue-based financing for working capital (10%)

This structure reduces immediate cash, aligns incentives, and keeps control with the successor while protecting seller upside.

Legal, tax and governance guardrails

Alternative financing changes the legal posture of the transaction. Key items to manage:

• Fiduciary duties: if you're a director or officer negotiating to buy out a minority owner, document fairness measures—independent valuations, special committees, or fairness opinions—to avoid claims of self-dealing.
• Appraisal and dissent rights: jurisdiction-specific rules can allow minority shareholders to demand fair value in a squeeze-out—factor this cost into your model.
• Tax treatment: seller notes can permit installment sale treatment in many jurisdictions—coordinate with tax counsel to optimize timing and obligations under IRC Section 453 (U.S.) or local equivalents.
• Inter-creditor agreements: when non-bank lenders and sellers both have claims, clear subordination and cure remedies prevent future deadlocks.

Negotiation playbook: getting a minority out without blowing up the business

1. Start with valuation alignment: run a valuation model (DCF + market comps) and publish a two-way price band—seller low, buyer high.
2. Map your capital sources: list investor partners, seller note capacity, potential earnout sizing, and private credit options.
3. Present a clean, staged offer: combine an attractive immediate payment + seller note + upside to keep sellers engaged.
4. Use escrow and holdbacks: protect buyer from post-closing liabilities while giving seller comfort on collection.
5. Document governance changes: amendment to buy-sell agreements and operating agreements should state post-closing rights and dispute resolution mechanisms (arbitration or expert determination for earnout disputes).
6. Lock in key employees: retention awards for critical talent reduce operational risk tied to contingent pay structures.

When developer financing, seller notes, and earnouts are not enough

There are scenarios where non-bank solutions are poor fits:

• Seller is unwilling to take any paper and needs immediate liquidity for personal reasons.
• Business cash flows are too volatile to service seller notes or earnouts.
• There are significant legal or regulatory hurdles—private equity or investor groups may avoid deals with unresolved litigation or major compliance issues.

Advanced strategies and 2026 predictions

Looking ahead through 2026, successors should watch and consider these advanced strategies:

• Use of special-purpose investment vehicles (SPVs): SPVs allow you to pool capital from multiple investors without diluting management control.
• Revenue-based financing for middle-market buyouts: as alternatives to term loans, RBF aligns lender returns with topline—useful for service businesses with predictable margins.
• Structured equity with performance tranches: tranche equity payouts that convert to common only after milestones—this reduces early dilution and pays investors for risk.
• Increased appetite from family offices for control transactions: in 2025 many family offices increased allocations to direct deals, and that trend is expected to expand in 2026—opening sourcing channels for successors.

Actionable checklist: funding a minority buyout without bank debt

1. Get a current valuation and a short investor memo (5–10 pages) focused on cash flows and exit options.
2. Identify potential investor partners and prepare term sheets showing expected returns and governance.
3. Discuss seller financing terms early—interest, tenor, security, and tax implications.
4. Design earnout metrics and dispute-resolution rules (auditor selection, measurement rules).
5. Draft inter-creditor and subordination agreements before signing the purchase agreement.
6. Secure the necessary board approvals and document conflict-of-interest processes to avoid fiduciary claims.
7. Close with escrow, indemnity caps, and clear post-closing covenants.

Case study snapshot: how a successor might replicate Titanium’s outcome

Imagine a successor needs CAD$6 million to acquire a 30% minority stake. Instead of a bank loan, they:

1. Bring in a family office to provide CAD$3M in equity for a minority rollover (30% of new equity).
2. Negotiate a seller note for CAD$2M at 7% interest amortized over 5 years with a 2-year interest-only period.
3. Structure an earnout for up to CAD$1M over two years tied to EBITDA growth, with third-party accounting rules.

Result: successor closes with limited dilution, seller receives a mix of cash and well-protected future consideration, and investor gets a path to exit with upside—all without a traditional bank loan.

Final cautions and best-practice reminders

• Always involve experienced M&A counsel and tax advisors early—seller notes and earnouts have complex tax consequences.
• Obtain at least one independent valuation if you’re an insider buyer to minimize litigation risk.
• Keep documentation simple and measurable—vague earnout metrics breed disputes.
• Anticipate and model downside cash flows conservatively; seller patience is finite.