Dealing with Debt in Business Sale or Acquisition
In an ordinary business transaction, you do not assume the debts of the seller. Buyers often prefer asset sales because they can avoid inheriting potential liability that they would inherit through a stock sale.
Financing a Business Purchase
The first thing to ponder is whether it is possible to buy a business with no money. Luckily, it is. 401(k) Business financing is an option for entrepreneurs who want to access funds to buy a business without the burden of interest payments and late fees.
When you are trying to buy a business without using your own money, you should always ensure that you enlist the services of an experienced professional who will make sure that the deal is structured properly.
Buying a Business with Debt
Do you assume the debt when you buy a business? In an ordinary business transaction, you do not assume the debts of the seller. Unless otherwise stated in the agreement, yes, you do assume the debt. Generally, when you buy a business, you buy the entire business, debts included.
What Happens to Debt in Business Sale
It is essential to understand what happens to debt when sold. In some cases, the debt is absorbed as part of the sale. However, this is not common. There is potential successor liability, which means the buyer assumes risk for certain liabilities.
Purchasing a Business without Cash Upfront or Debt
In an ordinary business sale, you do not assume the seller’s debts. However, when you purchase a business’s stock, you acquire all assets and liabilities. The seller may offer financing, allowing you to buy without cash upfront. Your 401(k) retirement funds can finance a business purchase without tax liability. Enlist an experienced attorney specialized in business sales to ensure proper deal structure.
Venture capital may be available, but bootstrapping is preferable if possible. Consider operational financing needs when buying a company. Vendor financing from the seller can fund repayment of the purchase price plus interest over time from business profits.
Seller financing happens more than you would think and is a creative way to buy without collateral. Make sure to ask about financing options. An asset purchase may not require shareholder approval but does not transfer over liabilities.
In a leveraged buyout, debt minimizes a buyer’s cash contribution but has disadvantages. Debt assumption may be part of seller payment but requires creditor approval. Focus on turnaround potential within budget constraints. Understand what specific liabilities transfers over before purchasing.
Buying a business means buying potential assets and liabilities, so "buyer beware" applies. This differs from other asset purchases. Not checking debts can greatly increase liabilities and reduce profits.