Debt and the Sale of a Business

You may be under the impression that if you sell your business, the debt your business has accumulated goes with the business to the buyer, or just simply goes away. But that is not necessarily the case. What happens to debt in the sale of a business can depend on how the sale is structured, and is often specifically negotiated between the parties to the transaction. (For the purposes of this article, let’s assume that this transaction is an acquisition of a smaller business by a larger business, and not a “merger of equals”) If the sale of a business is structured as a stock sale — that is, the stock of the company is transferred to the purchasing individual/company — the debt of the sold business typically goes also with it, as the purchaser, being the recipient of the sold business’ stock, effectively takes the place of the old owners, so the debt stays with the business. However, if the transaction is being structured as an asset sale — that is, the selling company sells all of its assets to the purchaser, while the corporate shell of the selling company remains intact — the disposition of debt usually becomes subject to negotiation. A purchasing company may be interested in purchasing only one line or division of a business, and may not want to take on any liabilities related to that line or division, so that the assets of that division are sold off, while related liabilities and the assets and liabilities of other divisions remain with the company. Of course, the amount of debt and liabilities being assumed by the purchasing company almost certainly has an effect on the selling price. These issues may not have any effect on entrepreneurs who sell their entire ventures as a means of cashing out or as an “acqui-hire”, but for those entrepreneurs who may sell off a successful product or line, but otherwise keep their company intact to build the next product or line of service, the disposition of debt will be an important issue to consider and negotiate.

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