Selling a business that is in Debt
So far we have covered the sale of businesses that generate a healthy profit and offered tips tricks and strategies to get the best possible price and in the fastest possible time. But what if your business is in debt, can you still sell and make a decent amount of money?
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Selling a company that is in debt
This post (first of two. You can access the second one here) will outline exactly what you have to do to sell your business in debt or with negative equity for a price that you will be happy to let it go for.
We will look at company structure, asset sales, share sales, the expectations when dissolving a company that owes money, and the rules around exactly what debt you can expect to inherit if you buy a business that is in debt or that has gone into liquidation.
If you’d rather hear than read the post then click play above, turn on the speakers, relax and pour yourself a coffee.
Before we start, this is not a blog post on how to sell a drowning duck of a business and pull the wool over the eyes of your potential buyer. It is about looking at the valuation of your business and how it can represent the best interests of both you and the person / company that wishes to buy it.
Is it worth selling a business in debt?
It can be still worth selling a business that is in debt, but this really depends upon how the company has been run to date, how self sufficient your company is and ultimately whether the proposed business sale will still result in a profitable enterprise even with the inherited debt.
A business that is running at a loss will always ring alarm bells to potential buyers – though that on it’s own will not be enough to see them run for the hills.
As a seller you will need to answer a few questions (many of which are covered in the due diligence process).
- Are the loans and credit in your name or in the business name?
If the debt is in your name, then I have some bad or good news. Depends upon how you look at it. There is a high probability that the debt is more of a personal debt. Even though the debt may not be passed to the new buyer you will need to look at how this can affect the operations of your business. Are you paying off a specific piece of equipment for example, the loss of which will impact the day-to-day operations of the business for sale?
Your business buyer would be less than impressed if you fall behind upon payments and a creditor is compelled to remove said piece of equipment.
While we are covering company equipment, a potential buyer will need to determine whether or not the debt owed on company equipment is in excess of the value of the equipment itself.
- How much is your company in debt?
The level of debt and the time till loans are paid in full can be a deciding factor to how much interest a potential buyer will show in purchasing your company for sale.
- Is your company debt reasonable?
Different companies offer different rates to different people depending upon their financial circumstances. If your debt repayments are considered unreasonable then this may have a negative impact on the value a potential buyer is likely to put on your business for sale. As a buyer however, I’ve seen new company owners renegotiate debt repayment rates to suit their own needs.
Other company owners have successfully purchased businesses where the original owners agree to shoulder the responsibility of the business debt themselves.
- Do you need to sell company assets to pay off a your company debt?
Ideally the answer to this needs to be no. If you can pay off a debt without selling company assets, then the company valuation will be less severely affected.
Depreciation is also a factor here. If your business assets are ten years old and still not paid off how much of an asset are they to potential new business buyers?
- Why is your company for sale in debt?
This is quite a big one. If your company for sale is in debt because it’s day to day running is simply not producing enough revenue to cover expenses then a buyer will need to determine whether this is due to inefficient management or because the company is simply not viable.
- How have you been paying your company debt to date?
A prospective business buyer will want to see that your company has been paying its debts using revenue generated by company sales. So, if you have been using credit cards to purchase essential items then this is something you will want to address.
What is your business enterprise value?
Potential business buyers and brokers will normally calculate your enterprise value when determining exactly how much your business is worth to them. In simple terms this can be done by adding your stock price and debts and then taking away money in your business. The figure you are left with is your approximate business enterprise valuation.
Is your company for sale drowning in debt?
Is your company for sale fantastic value minus the debt? May seem like a strange question but if you are able to pay off your company debt BEFORE putting your business up for sale the valuation and the amount you are likely to receive for your business sale may make the debt repayment that you have made negligible.
Is your company debt due to money owed by customers?
Your business may offer customers credit or for some other reason clients may be behind on their payments. In the first instance mentioned above, customer repayments can represent a multiple revenue stream. In this case your business debt is a carefully calculated and planned for circumstance – and interest placed upon repayments over time will represent a profit and therefore positive valuation. Your valuation here very much depends upon the customer contracts and agreements you have in place to secure the payment of monies owed.
If you have clients who are behind on payments then a potential buyer will look at this as more of a risk than in the above scenario. You will need to outline the amount owed and the steps you have or are making to recover your money.
That’s about it for this post. If you’re ready to move on you can jump directly to the second post in the series right here.
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If you have any questions about this post, or would like help buying or selling a business then contact us here, and we will be in touch as soon as possible to give you a helping hand.