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What Happens To The Overdraft When I Sell My Business?

Still Burning A Hole!

Still Burning A Hole!

Business owners often assume when selling their business that the overdraft will be taken over by the buyer. This is usually not the case. Any debts will have to be paid out of the proceeds of the sale.

Understanding what happens to any debts that your business has at the time it is sold, is a crucial part of understanding how much money you will be left with after all transactions costs and taxes have been paid.
 
So What Happens To Debt When A Company Is Sold?
 
Business buyers typically make an offer, in the terminology used for buying companies, “free of cash and debt”. This means the seller gets to keep any positive cash balances in the company, but any debt has to be settled at the closing out of the proceeds of the sale. Debt in this case does not just mean the overdraft. Lease finance, invoice finance, hire purchase agreements, directors’ loans, mortgages and any other form of borrowing by the company will be deducted from the money the seller receives.
 
Why Do Things Work This Way?
 
Try to stand for a minute in the shoes of the buyer. When a buyer makes an offer for your company he makes a judgement about what the fixed assets, working capital and cash flow of the business are worth to him. If a bank or other lender has secured finance against these assets (and the lending is not paid off at the closing) the buyer would pay you for the assets at the closing, and then have to pay off the debt secured against the assets over time. In a very real sense the buyer would be paying for the assets twice!

Another practical point is that the agreements you sign when taking out any kind of finance include a “change of control” clause. This means that any change of ownership in the asset against which the finance is secured, or a sale of a majority of shares in a company which owns the assets, automatically triggers a repayment of the debt.
 
How Does Debt Impact The Money You Receive?
 
Knowing what happens to business debt when selling your business is a critical part of understanding how much you will receive after costs and taxes at exit. It is also important to understand how the debt on your company’s books will influences the price offered by a buyer or investor. When selling a business you need to find an advisor that can work through the computations for taxes, debt repayments and transaction costs in order to understand how much any offer is really worth. You will need to apply the same calculations to each offer your receive to make a realistic like for like comparison.

 

If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964.

 
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