Seller Financing Series: What to do with Debt When Selling your Business

Another obstacle you may think exists to selling your business is making sure the buyer puts down enough money to retire existing company debt.  I understand the concern.  I had the same quandary when I sold my own business. We owned six vehicles with a debt of about $120,000. It would have killed my chances of selling the business if, at closing, the buyer had insisted that I pay this off plus the other items that I “wanted” to pay off.

While there are many ways to handle these issues, we are going to discuss an option that will work in some instances — a lease.

Here is what we did for my business, and I can often find something similar for your business sale.  It is/was called a lease. While we owed GMAC Financial Services $120,000, we turned around and leased those vehicles to the buyer for the same monthly fee as the monthly debt service. The lease we offered the buyer was for the same term, 48 months, as our debt with GMAC Financial Services; and at the end of the lease, the title of the vehicles would be transferred to the buyer with a dollar buyout.

Yes, you are still guaranteeing the note, but this still becomes a win/win situation. Consider that when I sold my business and since there was no bank involved in the sale of the business, if the buyer failed to make the payments to GMAC Financial Services, I could foreclose on the business EVEN if the buyer was paying my seller note perfectly. We put this into the loan documents as a covenant. The buyer paid monthly payments to escrow. The escrow company turned around and paid GMAC Financial Services. We used an escrow company for this so both the buyer and I could confirm with a third party that GMAC Financial Services was being paid on time. If the buyer was late on making a payment, then we were promptly notified by the escrow company.

Once the buyer went 30 days past due (before this time, I would have made the payment), I would foreclose. The “covenant” that we had in the paperwork didn’t allow for the buyer to “cure” or make the payment late. This meant that I would have simply owned the business again.

You can get creative with down payments too and you can do whatever you want when it comes to curing defaults. In fact, I now recommend for the seller to request that buyers pay a “down payment” on the lease. This down payment should be equal to two or three months’ worth of payments. The down payment is then paid directly to the lender – like GMAC Financial Services. When you use this method, if the buyer is a couple of days late, then it really isn’t a big deal since you have technically paid 90 days ahead.

I am NOT saying that you can do this in every situation, but you may be surprised at how many times this is possible. In fact, many times when you are leasing equipment, it is a simple application and phone call to get the lease into the buyer’s name. Also, I often see bank loans that are assumable.

I have been told by quite a number of sellers that “NO, my loan is NOT assumable.” And then after I review the loan documents and call the lender, guess what? It IS assumable after all!

Don’t let existing debt block the sale of your business.  Look at exactly what you owe and what options you have BESIDES paying the debt off. If you have a reputable firm representative that can help you (even with your lenders), it is possible to work out a deal with the lender (if they are unable to take you off of the loan) that you will stay on the loan for 12 months or 24 months. If the buyer pays on time, then your guarantee is terminated. This actually happens in a good percentage of the cases.

Also, look to see if the “debt” has a lien against the business and/or assets of the business. If it does not, it is possible that you are NOT required to pay off the loan when you sell. This can allow you flexibility when financing the business sale.

Yes, there is risk involved here. As the seller, you are still responsible for the original debtor, unless the lender takes your name off of the loan/lease. BUT if you think about it, the buyer is responsible to pay the loan and you have covenants in place to mitigate your risk.

Is it better to pay off all the debt or get your name off of the debt? Yes, of course. Don’t discount these methods, though; they may help you sell your business for the highest possible price while maintaining your equity.

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Scot Cockroft Business Broker
Hi, I’m Scot Cockroft.

When I founded Sigma Mergers and Acquisitions back in 2003, I had sold my business the year prior.

Now, that can sound good, but let me tell you, back in 2003, it was not easy to sell a business. Not that I’m saying in modern day times it’s easy to sell a business, but back then I interviewed broker after broker after broker, and no one was interested in actually seeing the value that my business brought to the table.

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