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Freedom 515 - Ohio

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Hudson Martin
Hudson Martin

Buying A Business With Debt TOP

Conventional, SBA, and online lenders typically instruct small business owners to submit financial documents for the existing company, including cash flow, operating expenses, and physical assets. You should work with the current owner to get business valuation details and financial statements.

buying a business with debt

Many business owners don't put a lot of thought into what happens to their company's debt when they sell their business. While there are cases where the debt is absorbed in the transaction as part of the sale, it is wrong to automatically presume that it will be cleared of all debt just because the business is being sold.

Knowing what typically happens to business debt when selling a business is a critical part of the exit planning process and largely depends on how the transaction is structured. The two most common sale structures are stock sales and asset sales. Let's take a look at how each format recognizes debt at closing.

In a stock sale, the buyer takes over everything that an entity owns; including all assets and all liabilities. For instance, if a business is sold as a stock sale and at closing the business owes money, the new owner would now be held liable for that debt.

As alluded to earlier, most small businesses are sold as an asset sale due to the unknown risk(s) that comes with taking over all the liabilities associated with the selling company. To hedge against any unwanted surprises, most small business buyers pick and choose specific assets and liabilities so they know precisely what they are inheriting. To effect a sale, the buyer forms a corporation and that newly formed corporation purchases agreed upon assets of the selling corporation.

This simply means that when the buyer buys the company, it will be structured such that the buyer will not assume any of the debt on the seller's balance sheet and will not get to keep the cash on the seller's balance sheet. That is to say that at the time of closing, the seller gets to keep existing cash on their balance sheet (generally with exception to an agreed-upon amount of operating cash" that is considered the minimum threshold amount the company requires to keep its operations running smoothly). Consequently, the seller is expected to pay off any debt obligations with the funds available after the sale.

Since the buyer is going to pay $1 million for the value of the business, the seller will receive $1 million and pay off $110,000 in net debt ($200,000 offset by the excess cash of $90,000). The seller walks away with $890,000.

Ultimately, company debt affects how much the seller stands to personally earn from a sale. It is therefore not safe to believe a buyer will assume your debts or that your lenders will allow someone else to assume your debts. When looking to plan an exit, sellers must assess their business's debt situation and educate themselves on the different sale structures available to them to affect the sale they want to make happen.

I know of a specialty printer that was for sale. It had two factors in sync but not the third. The company, doing about $5 million in sales, had reported a high pretax profit in the last year of 22% of sales, or about $1.25 million. The price was quite reasonable at $5 million, four times pretax income. The problem was a lack of assets. Unlike many printers, the company had equipment that was small, simple, and inexpensive. This made the company efficient, but a buyer borrowing against its assets (receivables, inventory, and equipment) would scarcely net $2 million, leaving a huge gap of $3 million. Clearly, this was not a doable asset-based LBO. The business finally sold through a variation of a cash-flow LBO with the buyer getting together a group and offering substantial collateral for the loan.

The CFPB found that Encore and Portfolio Recovery Associates attempted to collect debts that they knew, or should have known, were inaccurate or could not legally be enforced based on contractual disclaimers, past practices of debt sellers, or consumer disputes. The companies also filed lawsuits against consumers without having the intent to prove many of the debts, winning the vast majority of the lawsuits by default when consumers failed to defend themselves. These practices violated the Fair Debt Collection Practices Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act.

If you're struggling with small business debt, one alternative to filing for bankruptcy is to sell your business. But it's not always easy to find a willing buyer. Whether someone will be willing to buy your business depends on its profitability, assets, liabilities, and overall market conditions. If you have a profitable and reputable business with assets in excess of liabilities, you shouldn't have a problem finding a buyer under most circumstances. But if your business has consistently been losing money, has more debts than assets, or if the market conditions aren't right, you might have a difficult time finding a buyer to take on your business.

Even if you find a buyer, selling the business might not be in your best interest. If you're personally liable for the obligations of the business, selling it won't get you off the hook unless you pay off the debt or the creditor releases you from liability.

A business sold as a "going concern" (an active business that won't be liquidated in the foreseeable future) will generally be worth more than if you try to sell its assets individually at liquidation prices. As a result, selling your business will likely bring in more money to pay off business debts and might leave you with more cash in your pocket.

Dealing with one buyer is usually easier than trying to sell multiple assets to different buyers. Selling your business as a whole also gives you more options for dealing with business debts. If the buyer has money, you can get a lump sum to pay off all business debts.

Alternatively, the buyer might want to pay less but assume some or all debts of the business. However, keep in mind that if you're personally liable for certain debts, your obligation won't be eliminated unless the creditor agrees to release you.

Most people buy a business because it is profitable or has valuable assets. If your business isn't making money or has more debts than assets, you might have a hard time finding a willing buyer. If you can't find a buyer, you might have to negotiate with your creditors and liquidate the business.

If you're personally liable for business debts, selling the business doesn't eliminate your liability. The buyer might agree to pay some or all of the business's debts, but you're still on the hook unless the creditor agrees to release you. As a result, the creditor can still come after you if the buyer fails to pay.

Depending on your circumstances, closing the business might provide you more benefits than selling the business or filing for bankruptcy. Shutting down your business involves liquidating its assets and negotiating settlements with creditors.

Liquidating the business gives you the option to settle the debts most important to you, like debts you are personally liable for, first. Further, most creditors are happy to negotiate a settlement for less than the full balance of the debt because litigation is expensive, and they don't want to push you into bankruptcy where they might receive even less. But the IRS might consider such a settlement a benefit similar to income, so it could result in additional tax liability.

Again, if you're personally liable for a business debt, you must pay it off or have the creditor release you from liability. Otherwise, the creditor has the right to go after your personal assets if the business assets aren't enough to pay off the debt.

By doing nothing, you risk the creditor suing you and getting a judgment that can be enforced by selling your personal assets. If you liquidate the business, make sure to settle and pay off the debts you're liable for first. If you sell your business, consider asking for at least enough money to pay off these debts because even if the buyer assumes them, you're still responsible if they're not paid.

The Servicemembers Civil Relief Act (SCRA) assists active-duty military with financial burdens. Under this act, you may qualify for a reduced interest rate on mortgages and credit card debts. It can offer protection from eviction. It can also delay civil court, including bankruptcy, foreclosure, or divorce proceedings. To find out if you qualify, contact your local Armed Forces Legal Assistance office.

A debt collector generally is a person or company that regularly collects debts owed to others, usually when those debts are past-due. This includes collection agencies, lawyers who collect debts as part of their business, and companies that buy delinquent debts and then try to collect them. The Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from using abusive, unfair, or deceptive practices to collect from you.

The Act covers personal, family, and household debts. This includes money owed on personal credit card accounts, auto loans, medical bills, and mortgages. The FDCPA does not cover debts incurred in running a business.

Within five days after a debt collector first contacts you, the collector must send you a written notice that tells you the name of the creditor, how much you owe, and what action to take if you believe you do not owe the money. If you owe the money or part of it, contact the creditor to arrange for payment. If you believe you do not owe the money, contact the creditor in writing and send a copy to the collection agency informing them with a letter not to contact you.

Today, as part of the fight to help Americans deal with high costs, the Biden-Harris Administration is announcing new actions to protect consumers and lessen the burden of medical debt on American families. Together, these actions will help:

Today, Vice President Harris is announcing reforms in four areas that will lessen the burden of medical debt, protect consumers, and open up new opportunities for Americans looking to buy a home or start a small business. 041b061a72


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