What Happens To Debt When Selling A Business?

what-happens-to-debt-when-selling-a-business

Many times when a business gets sold it can be very difficult for creditors to recover any outstanding debts.

This is due to a number of reasons, which we will discuss in this article, along with some tips on how you can protect yourself from a bad debt expense.

When you learn that a customer is selling their business one of the first things you will want to investigate is how the business is being sold. There are two main ways that a business sale can be structured. As a Stock Sale and an Asset Sale.

Stock Sale

A stock sale is for everything that an entity owns including assets and liabilities. So this would mean that if the business owed you money the new owner would now be responsible for paying the debt.

This type of sale structure is generally only used for large companies where the sale price is in excess of $10 Million, because it can be very time consuming and costly to investigate any and all liabilities a company currently has, and most small business buyers don’t have the time or resources to do this type of due diligence.

Asset Sale

An Asset Sale involves the transfer of specific assets and liabilities. During negotiations the buyer and seller will decide what assets and liabilities are included in the transaction.

As you can see from the above sale types it can become very confusing as to who is actually liable for any debt that the customer owes your business.

This is why it is always better to be proactive and start to make arrangements to settle all accounts before a business is sold.

Knowing Why A Customer Is Selling their Business

There are many reasons why a customer might want to sell their business. They may be ready to retire and have no successor to take over, they could be moving town and not be able to relocate the business, or they could have personal issues such as divorce or illness that is forcing them to sell.

There are also times when a business is doing great and the owner decides that now is the time to cash out.

But unfortunately more often than not the reason for an owner wanting to sell is because the business is failing and they no longer have the financial resources or energy to keep it going.

In this case it can be very difficult for vendors to recover any outstanding debts once the business is sold, which is why you need to take action now.

How To Protect Your Business

The first line of defence is to stay informed when a customer is selling their business. If this is due to financial difficulty then it’s likely they will not want you to know their business is up for sale. So it is important that your customer service, sales, delivery, credit and collection staff are alert to this and notify you when they learn that a customer’s business is up for sale.

When this situation arises try to get a little more information as to the reasons behind the sale.

Once you’re aware of your customer’s intention to sell you need to be extra diligent in following up outstanding accounts receivable and also extending credit on any future purchases. Depending on their reasons for selling it may be time to require all future purchases are paid for upfront until the new owner takes over.

If you are having trouble closing outstanding accounts before an impending sale, it would be wise to act fast and secure the help of a professional debt collection agency who has experience in dealing with debt recovery from businesses for sale.

Written by Richard Thompson

Richard Thompson is the Managing Director and owner of JMA Credit Control and has over 25 years’ of trusted experience. Richard has a wealth of knowledge in Credit Management and Debt Recovery ensuring client’s recovery bad debt quickly and cost effectively.

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