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? Over time the larger debts will be paid, and then the business will only acquire minimal debts as it continues to grow and develop. So what can you do to sell your business with debt?
How To Sell A Business With Debt?
What if you want to sell your company and you still have debts? 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? We will answer these questions as well as the common strategies to manage business debt when selling a business.
Let’s look at the impact debt has on listing your business for sale.
How Does Debt Effect Selling My 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, a lot of buyers might avoid purchasing your business.
Selling a business with debt can have the following impacts:
- Buyers may be disinterested in your business since it has debt.
- You may have to sell your business for less money to find interested buyers.
- Your business valuation will take into account your debt, and the value of your business may be lower than you expect.
- During negotiations for the sale of your business, your existing company debt can be a hot topic that is highly discussed and debated.
How To Perform A Business Valuation On A Company With Debt?
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.
Is Selling A Business With Debt More Difficult?
If there is a lot of debt, it can be more difficult 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.
Three Ways To Manage Business Debt When Selling Your Company
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.
1. Pay Off Debt Before Selling Your Business
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.
2. Pay Off Debt With The Profits From The Sale Of Your Business
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.
3. Transfer The Debts To The New Business Owner
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.
Negotiate How The Company Debt Will Be Handled In The Purchase Agreement
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. You can also learn about the difference between an asset sale of a business and a stock sale of a business.
The last way to effectively negotiate the sale of your company with debt is to hire a professional business broker.
The Best Way To Sell Your Company With Debt
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.
We provide a confidential consultation with no fee until your business is sold. To speak with one of our Senior Business Brokers, please fill out our quick online form or email [email protected]. We sell businesses in NY, NJ, CT, MA, PA, NH, RI, VT, ME, MD, VA, DC, DE, TX, LA, TN, VA, NC, SC, WV, KY, OH, IL, IN, MI, and MO.