Not only a thriving business can be sold, sell a business with debt is also a regular occurrence.
Many entrepreneurs think they have to have a pretty profitable business to sell their business. But that is just a little too short of the mark. Almost every entrepreneur has some form of debt in their business, but it is just a question of what type of debt is involved, whether there is profitability and what deal structure is rigged.
Type of debt
Most business owners do have a business loan running with the house bank, creditors that still need to be paid or a repayment with the tax authorities. These are all forms of debt that the business carries. And fundamentally, these are all healthy debts, because you don't have to (or can't) finance everything with equity. Plus, it's tax deductible, so really a waste if you leave this money lying around. But make sure the debts don't skyrocket and start affecting your bottom line.
Profitability of the business
So sell a business with debt, like the example above, is quite possible. A buyer will look primarily at the profitability of the operational activities. Suppose your business is valued at seven times the profit of 125,000 euros; then your business is worth 875,000 euros. With that, any buyer will see that a business loan of, say, 75,000 euros is dwarfed, and selling your business is unencumbered by debt.
But what if your business does not make a profit of 125,000 euros, but records a loss of 25,000 euros under the line? Then the business value is also negative and it is a lot harder to sell your business. Because a buyer has no proof of future activities that will generate money.
Types of buyers you can sell your business to
If you then want to sell your business to an MBI candidate or to an employee, there is a chance that the business sale will not go through. Even if these buyers were positive about a business acquisition, a tough process awaits to raise external financing to fund the business acquisition.
Of course, the chances of selling your business are higher when there is a competitor on the doorstep to take over your business. A strategic buyer - such as a competitor, industry outsider or investor - usually has deeper pockets and can cut many costs through synergy benefits.
Chosen transaction form when sell a business with debt
The success rate of sell a business with debt also depends on who remains responsible for the debts after the business sale. In a stock transaction, you sell the entire business, including assets and debts, rights and obligations, contracts with suppliers, staff and customers, licenses and permits, and debts with the tax authorities.
In an asset/liability transaction, you sell (usually part of) your company's assets and debts. Often in such transactions, machinery, inventory, inventory, personnel and things like leases are taken over by the buyer. Bank balances, debtors, creditors and bank debts usually remain with the seller; the same goes for "the past" of the business and related (tax) claims.
Is the debt higher than revenue?
Do you sell your business with debt anyway, but the proceeds are lower than the debt? Then you are left with a residual debt that may be difficult to repay. After all, you sold your business and therefore can no longer recoup the residual debt. You would therefore do well to ask yourself whether you want to sell your business quickly or whether you still have time to reduce your debts, increase profitability and thus at least write black figures to avoid being stuck with a residual debt.
