Selling your business even if it is in debt
Selling a business in debt can be a tricky process, and that’s why WeSellAnyCompany.com have put together this useful easy to follow guide to help clear the murky waters and make the process easy to manage.
If you have not yet read (or listened to) part one, then you can access it here.
This blog post is also available in audio for those among you who prefer to sit back and listen rather than read.
So, if you are considering selling or buying a business that has perhaps a significant level of debt then read on. We’d be happy to answer questions about this post and offer advice tailored more toward your own business sale too. Just contact us here, and we’d be happy to offer you FREE no obligation advice.
Now, on with part two…
Do company debts depend upon company structure?
Limited company vs sole trader company debt: When you run a limited company then the company is a legal entity and can be sued as such thereby reducing and, in a perfect world, eliminating the liabilities of the company directors of all company debt.
Creditors however are often wary when offering credit to a limited company because they know that if the company goes into liquidation then the repayment of monies owed may not happen or will happen at a very low rate over a very long time. Creditors will often therefore ask for personal guarantees in the event of the limited company being unable to satisfy contractual repayment obligations.
Selling a limited company in debt
Any debts that your limited company owes when the business is sold (or moves into liquidation) moves to it’s creditors but if personal guarantees have been given then those debts are first moved to the individuals named on the guarantees.
Selling a sole trader or partnership business in debt
With companies that are set up as either sole trader or partnership, all debts owed by the business are in effect personal debts owed by the individuals that are named on the contract or credit agreement.
What is an asset sale of a company in debt?
Prospective buyers may want to purchase your company assets INSTEAD of buying the business as a whole. We have seen business competitors do this who want to incorporate your business assets into their existing model, rather than shouldering your business overheads and debts.
What business assets can you sell?
Do you know what you have in your business that can be officially recognised as an asset? Here is a quick checklist:
An asset is anything that represents an economic resource for your business. It all comes down to money in the end, so something that carries an inherent value. To be a business asset then the assets must be owned by the business and used at the business owners (or director) discretion.
Current Assets can be used in the valuation of your business for sale.
Cash and items that can be converted to cash within one year are known as current assets and can be used in your business valuation when preparing your business for sale.
Fixed assets that can be used in the valuation of your business for sale
Fixed assets such as buildings and equipment can be used in the valuation of your business for sale but they are subject to depreciation – that is some of these items will lose their value over time.
Of these items some will be termed as accelerated deprecation – that is they lose their value faster in the formative years of its use.
Can investments be used as assets?
It very much depends upon the investment but it is entirely possible to use shares and stocks as business assets that can be used in the valuation of your business for sale.
Can non-physical assets be used in the business valuation?
Intellectual property (IP) trademarks and copyright are frequently used in the valuation of a business and we have seen businesses with debt sell as a reasonable price purely because a competitor wants ownership of an IP.
Business reputation is not considered as often as it might but it is an equally viable asset. If a company is drowning in debt but has an amazing brand image and reputation then it stands to reason that with the right team, the business that already has this path to market can thrive.
Selling part of your business in debt
Some company owners elect to sell assets, then use that money to pay off their business debts. This means that the business can carry on operations debt free or becomes a more attractive proposition to future buyers – minus the assets sold, of course.
Considering buying a business with debt?
We Sell Any Company.com help business buyers get the best price as well as business sellers, so it’s only fair to offer a word or two of advice to business owners, brokers and investors who are considering taking on a business with debt.
There are varying levels of debt that a prospective business owner may be willing to accept. The extreme, naturally, will be for businesses that have gone into liquidation. There will be a focussed post on this in due course but till then lets look at a few areas you might want to consider before putting an offer in on a new business:
Do company liabilities outweigh company assets?
Possible red flag here. If the business for sale is borrowing more than they are making then it can point toward an intangible company or a badly run one. If you think that under different management, the business can turn a profit then you may be in line for a bargain as the business seller could be persuaded to accept a lower offer rather than mount up further debt.
Theo Paphitis (famously of Dragons Den) made quite a name for himself buying failing companies and turning their fortunes. His strategy relied quite heavily on purchasing chains with an existing and positive brand image. The money saved on marketing an existing business with a good reputation and a steady customer base can be quite significant.
Alternatively you may not want to purchase the whole business but owning a competitors intellectual property could result in a cost effective, time saving opportunity for you.
What debts will you inherit when buying a business in debt?
If you are purchasing a business from a sole trader or a partnership then you will normally find that business debts are in the previous owners name rather than the business name. Existing owners of the business however may want to include what they class as company debts (in part or whole) in with the sale price and business valuation. It is your choice however as to how attractive a proposition this is to you.
If you are purchasing a limited company then you will naturally inherit company debts in with the sale price and this will be taken into consideration. It is worth noting here however, that creditors dealing with limited companies will ask for personal guarantees from company directors in the event of the company not being able to cover their costs.
Purchasing a limited company is also known as a share sale. If you are purchasing the whole company then you are effectively the proud owner of 100% of the shares of that company – including the business debts.
If you are considering a share sale like this then make sure you conduct thorough due diligence to make sure there are no pending lawsuits, employee disputes and that their tax obligations are fulfilled and up to date.
Thank you for reading. I hope you have found this useful. I believe we have earned a shameless plug here so, if you would like help buying or selling a business in debt then WeSellAnyCompany.com are here to help.
Similarly if you are a business broker looking for a platform and an amazing industry specific team to help sell your clients’ businesses then get in touch.
For all of this and for free advice get in touch here and we’ll be in touch soon.