Can you sell a company that has existing debt?

What Happens to Company Debt When Selling a Business?

The treatment of company debt during a business sale depends on the type of transaction—typically an asset sale or a share sale.

An asset sale allows business owners to sell selected assets rather than the entire company. This approach enables buyers to acquire specific assets that align with their strategic goals while avoiding unnecessary liabilities and overhead costs. Asset sales are often used to divest underperforming or non-core business segments, allowing sellers to streamline operations, reduce expenses, and reinvest proceeds into core business functions.

In contrast, a share sale involves transferring ownership of the entire company, including all assets and liabilities. In this case, the buyer assumes responsibility for the business’s outstanding debts. During the early stages of negotiations, company liabilities are disclosed through due diligence and buyer inquiries to ensure transparency.

Understanding the implications of each type of sale is essential for both buyers and sellers when structuring a transaction to align with their financial and strategic objectives.

Common Types of Company Liabilities

Company liabilities are typically classified as either current or long-term on a balance sheet. This distinction helps assess when debts are due and whether they are short-term (payable within one year) or long-term (exceeding one year for repayment).

Examples of company liabilities include:

• Creditor Obligations: Outstanding payments to creditors, including HMRC tax liabilities, Covid-19 Bounce Back Loans (BBLs), overdrafts, credit card balances, and commercial financing (e.g., asset finance or invoice finance).

• Accounts Payable: Amounts owed to suppliers and vendors for goods and services received, as well as short-term operational expenses such as utility bills and internet costs.

• Employee Wages and Benefits: If the workforce remains unchanged during and after a business sale, liabilities may include employee salaries and employer pension contributions.

When selling a business with outstanding debts, the willingness of potential buyers to assume these liabilities depends on several factors, including the company's financial position, repayment capacity, and room for price negotiations.

Existing debts will influence the buyer’s valuation and ultimately impact their final offer.

How Does Debt Impact the Sale Price of a Business?

When preparing to sell your business, it is essential to settle outstanding debts, address any financial obligations, and ensure your financial records are up to date. A business with minimal operating costs and low overheads is often more attractive to prospective buyers, increasing the likelihood of securing a competitive sale price. Additionally, businesses with lower debt levels may command higher valuations and generate stronger offers from interested parties.

However, businesses carrying significant debt can still attract buyers, though the outstanding liabilities will be factored into the sale price. Buyers may adjust their offers to account for the level of debt assumed in the transaction.

To determine the true market value of your business, consider arranging a professional valuation with an experienced business valuer, such as Casa Business Sales.

While normal operating costs continue to accrue, it is crucial that liabilities do not exceed assets, as reflected on the balance sheet. If your business has high levels of borrowing, optimising its financial position before listing it for sale can enhance its marketability.

For businesses in financial distress or insolvency, assets may need to be liquidated to repay creditors through a formal insolvency process, overseen by a licensed insolvency practitioner.

How Can a Business Transfer Agent Help?

If you're looking to sell a business with outstanding debt, a business transfer agent can provide expert guidance throughout the process. At Casa Business Sales, our experienced business brokers specialise in national business sales and offer free business valuations for owners considering a sale. We assist in preparing your business for the market, ensuring it is strategically positioned to attract qualified buyers and secure the best possible outcome.

Contact us today to learn more about valuing and selling a business in debt.