Selling A Business With Debt

Selling a business with debt involves transferring your business’s debt to the buyer or using the funds raised from the sale of the business to pay off your debts. Many sellers choose to sell their business with debt as an asset sale, where they can transfer each asset and liability separately to reduce their debts.

What does selling a business with debt mean?

Selling a business with debt involves selling your business while it is in debt, either to creditors (like banks or loan companies) or to suppliers. In some cases, you can sell your business, and the debt will be absorbed in the transaction as part of the sale, with the money generated covering your current debts.

However, this is not often the case. When you sell a business with debt, you are usually presented with two options: to sell the business as a stock sale or an asset sale. Each option significantly impacts your debt, so we have outlined your options below.

Stock sale

A stock sale is when the buyer purchases all the stock, assuming everything the business owns or owes, including assets and liabilities. A stock sale isn’t very common, with less than 5% of businesses sold for under $10 million being structured as stock sales.

During a stock sale, you must determine what assets and liabilities your buyer purchases. Once the sale closes, you will sign over stock certificates to the buyer, making them the owner of the entity and the indirect owner of the assets and liabilities of the business. There are three exceptions to liabilities that remain your obligation after the sale closes, including:

• When the seller personally owns liabilities
• When the buyer requires you to pay all debt at closing
• When the seller agrees to be responsible for the debt post-closing, even if the entity may be legally responsible

Asset sale

An asset sale involves transferring specific assets and liabilities directly from the buyer to the seller at the sale’s closing. Both parties can pick and choose what assets and liabilities they want to include in the sale. There is a negotiation period here where the buyer and seller both must agree on what assets and liabilities are included. Often, the following assets are included in the purchase price of the business:

• Accounts receivable
• Inventory
• Working capital

Asset sales are more complicated than stock sales as the individual assets and liabilities are purchased and sold, but it can be a better option if you want to retain some assets.

Debt paid at closing exceptions

There are two exceptions to this: debt will be paid at closing when there is leased equipment or successor liability. In these situations, a business broker can provide you with guidance to ensure that your assets are protected during the sale of your business.

Is there capital gains tax on the sale of a business with debt?

If you sell your business for more money than you purchased it for, you will be liable to pay capital gains tax. The tax is applied to the money made on top of your initial investment and must be paid to the Australian Taxation Office (ATO). However, there are many exemptions or credits that can reduce the capital gains tax you must pay.

These exemptions have strict requirements that you must meet to qualify for exemptions or reductions. It is important that you seek financial advice to ensure that you get the right tax reduction when paying capital gains tax on your business with debt.

What are the tax implications of selling a business with debt?

You might need to pay income tax, goods and service tax, and capital gains tax when selling your business with debt. How much tax you will need to pay varies depending on the amount you have sold your business for and if you qualify for any tax exemptions and reductions. As every situation is different, we recommend seeking advice on this from an expert to ensure that you don’t pay too much or too little tax for your sale.

What are the benefits of selling a business with debt?

Selling a business with debt comes with a few advantages, including reducing any stress that you have and freeing up time for you to refocus your energy and pay off remaining debts. We have outlined the major benefits below:

It relieves pressure

Selling your business with debt can help to relieve pressure, as you won’t receive any threats from creditors or legal action. You won’t have to try and work out payment plans or face increasing interest and additional costs the longer you go without paying the debt. By relieving some of this pressure, you might notice changes to your mental health, too, and the pressure of repaying your debt is lifted.

It allows you to refocus energy

By selling your business with debt, you can free up time and space to refocus your energy. Instead of worrying about your payments or struggling to find a way to repay your debt, your debt will be paid, and you can focus on other projects or debts that you can tackle paying off.

You can also use the additional energy to focus on other asses that you have or take this time to focus on your next business venture.

It helps you pay off other debts

Selling a business with debt allows you to focus on paying other debts off. Any additional money that you make from the sale of the business can be used to pay off debts with higher interest rates. Doing so allows you to reduce your overall debt costs and allows you to chip away at debt that is costing you more every month, helping you focus on tackling your debt.

What legal considerations do I need to make when selling my business with debt?

When selling a business with debt, you must disclose all debt to potential buyers to ensure that they are aware of the debt before purchasing your business. Failure to do so could cause the sale to fall through, and you might find it challenging to get a new buyer.

You must also inform your creditors of plans to sell your business with debts, as they have a vested interest in this. Your creditors will need to be told if they will receive the money as part of the sale or after the sale has closed.

You must ensure that all contracts are clear about the transfer of the debt to avoid any ambiguity and ensure that the sale is compliant with consumer protection laws and debt collection practices. We know this can be confusing, especially if you have never done it before, and that is why we recommend seeking legal advice and support from a business broker.

How to value a business being sold with debt

The best way to value a business being sold with debt is to use a business valuer. Experienced business valuers will know how to offer a fair and accurate price for a business being sold with debt to ensure a quick sale for you. They will be aware of the legalities surrounding selling a business with debt, too, and they will help you make the right choices when selling your business.

How do I sell my business with debt?

To sell a business with debt, you need to disclose the business’s liabilities and negotiate the debt in the sale of the price. Should buyers not be happy to take on your debt, you can look at restructuring your debt with your creditors to ensure that the sale of your business will generate enough money to cover your debt.

You should use a business broker to assist you with the sale, helping you find the right buyer for your business.

Get in touch with a business valuation expert near you

Business valuers are the best way to know the worth of your business with debt and help you get a fair price.

We have business valuation experts across Australia, and you can get in touch with them by following the details below:

• Get in touch with our business valuation experts in Brisbane
• Get in touch with our business valuation experts in Sydney
• Get in touch with our business valuation experts in Melbourne
• Get in touch with our business valuation experts in Perth
• Get in touch with our business valuation experts in Adelaide
• Get in touch with our business valuation experts on the Gold Coast
• Get in touch with our business valuation experts on the Sunshine Coast