Acquiring debt is sometimes part of running a business. You need to spend money to make money. Many business owners accumulate large amounts of outstanding debt when they first start a business. As the business starts to provide a return on its investments, the debt can be paid off.
But what if you are ready to sell your business but you still have debts to pay? Should you wait until they are all paid off? What is the best way to manage your business’s debt through the sale of your company? This guide will answer these questions and introduce the common strategies to manage business debt when selling a business.
Debt can affect the sale of a business in different ways. If your business is extremely profitable and growing, the debt it has accrued may be insignificant to buyers. If your business is mildly profitable but has a large sum of debt that it is responsible for, many buyers might avoid purchasing it.
Selling a business with debt can have the following impacts:
While sometimes debt may be included in the sale of a business, you can sell a business without its debt. Whether a buyer acquires debt with the company they buy depends on how the transaction is structured. In most cases, you can structure a deal as a stock sale or asset sale. Let’s explore how these types of sales affect how debt is handled at closing.
A stock sale is when a buyer purchases the stock or membership interests of the seller’s LLC or corporation. In this case, they take ownership of everything the company owes or owns, including its assets and liabilities. A buyer will typically want to purchase a business this way if the company owns something that they would only be able to receive in a stock sale.
The seller must establish the assets and liabilities a potential buyer can gain with the sale. What happens to liabilities when a company is sold? First, we’ll need to look at what company liabilities a sale may include.
The most common type includes creditor debt, which is any money the company owes to creditors, such as credit card balances, tax debts and commercial finance. Liabilities also include accounts payable for essential monthly bills, employee wages and employer pension contributions, if the employee structure remains the same.
Buying a business in debt in a stock sale allows the buyer to become an indirect owner of assets and liabilities the entity owns. However, they may avoid liabilities if they are owned by the seller as an individual, the seller agrees to continue paying the debt post-closing or the buyer requires the seller to pay the debt before closing the deal.
An asset sale focuses on transferring only particular assets and liabilities over to the buyer. This allows both parties to choose which assets and liabilities they want to include in the sale. In most cases, the buyer may choose to include all assets, minus the company’s liabilities. These assets will typically include working capital, inventory and accounts receivable. Asset sales are more common with small businesses to avoid any unknown liabilities like product liabilities and litigation.
Performing a business valuation on a business with debt is not as complex as it might seem. A business broker will perform a business valuation, and they will include the debt in that valuation. If you assume responsibility for the debt after the sale business, the existing debt will have less effect on your business valuation.
When a business broker looks at your business to perform a business valuation, they look at multiple factors that determine the value of your company. One of the factors in the valuation of your business is assets and liabilities.
Your business’s outstanding debt is viewed as a liability. Minimize the liabilities and take steps to increase the value of your company. If you do this, you can effectively sell your business for more.
If there is a lot of debt, it can be more challenging to sell your business. Having debt and trying to sell your company simply presents extra barriers. It is not impossible to sell a business with debt; it is simply an additional factor.
There is a large amount of risk involved with purchasing a company. Purchasing a company with a lot of debt just increases the risk.
You might consider paying off your company’s debt and then trying to sell your business. If you are ready to sell your business now, start the process of selling your company and work at paying off your debts in the meantime.
There are typically three ways you can sell your business and manage your debt. You can always do mixed variations of the three but below are the primary ways. Choose wisely to sell your company with debt more effectively.
The most profitable way to sell your business is to pay off the debt before selling. Without debt as a stumbling block, your business will look excellent to buyers. Get ahead of the competition and sell your business without debt.
In this situation, you take on the responsibility for the business debts. While this seems costly, it is one of the best ways to sell your company with debt.
The benefit of doing this is you’ll receive more money for the sale of your business, and buyers will be more enticed by your business. The negative side is you won’t receive more money when it is all said and done. The money you receive is used to pay off the debt, so you aren’t exactly receiving more profits. Also, remember the money received will be taxed.
While paying off the debt with the profits from your sale of a business might have certain benefits, it also has negatives.
You can also transfer the business debts to the new business owner. This is often done with a stock sale where the buyer purchases the whole business, including the debts. A stock purchase is an effective option in selling your company.
However, keep in mind that some buyers may not want to purchase the stock and assume the debt, so it is good to be flexible to maximize the options you have when selling a company with debt.
How should you negotiate the sale of your indebted business? There are three things you can do to make the negotiation process more efficient.
First, have all of the information on your business’s existing finances and debt. Discussing your company’s debt with a potential buyer is much more effective when it is clear what is being discussed. Transparency with a buyer on your business’s debt is vital to effective negotiation.
The second thing you can do to negotiate your indebted business’s sale is to learn more about the different ways you can sell your business with debt, such as carrying out an asset sale or stock sale, to negotiate a convenient solution for both parties.
The last way to effectively negotiate the sale of your company with debt is to hire a professional business broker.
Selling your business in the transportation industry requires a few special considerations. Here are a few tips you can follow when selling a trucking or logistics business.
The first step is to decide what you want to do with your company’s debt. Will you sell it with your business in a stock sale or continue paying the debt after an asset sale? You may also choose to pay off the debt before selling to ensure the company looks more desirable to potential buyers.
It’s best to try to increase the company’s value before selling to ensure you make the most profit out of your transportation company. You can do this by increasing your sources of income and minimizing your company’s debt, especially if you plan to transfer the debt to the buyer during a sale.
Mergers and acquisitions brokers offer an effective way to market and advertise your transportation business and negotiate the terms and conditions of your company’s sale. Choose a brokerage that specializes in selling transportation companies. These brokers typically have the latest knowledge of your industry to sell your business effectively.
What is the best way to sell your company with debt? Since it depends on your specific business, your profitability as well as the amount of debt, the best way is to contact a professional business broker to sell your business.
It always helps to have an experienced M&A Broker on your side when navigating the complexities of the sale of your company with debt and other questions about what is included in the sale of your business. Synergy Business Brokers specializes in selling companies in various industries like construction, manufacturing, healthcare, software, distribution, services, contractors, technology, engineering, transportation, consulting, and environmentally friendly companies.
If you’re considering selling your business, contact us for a free, confidential consultation. We don’t charge any fees until your business is sold. When you’re ready to reach out to our Senior Business Brokers, fill out our quick online form. We sell businesses in:
