Is Debt Really a Big Deal when Selling Your Business?
You may be wondering if you should pay off all your business debts before marketing your business for sale. Perhaps you are worried that debt might put off potential buyers. The fact of the matter is, it’s not as big a deal as you may think.
Ask yourself this: what business operates without debt? Very few! Most organisations have a combination of core debt and leasing or hire purchase debt. That’s just how a business operates.
Business as Usual
According to Kevin Cranfield, Managing Director of Bentleys Chartered Accountants, it is much wiser to continue running your business as you would normally in the lead-up to a sale.
“If your business runs on a certain continual level of debt, that’s quite normal. Any prospective purchaser would expect it to have debt on its books,” he said.
“As the sale gets closer, that debt will be allowed for in the transactions details and you may have to clear the debt as part of the sale.”
Debt is generally a necessary part of any business operation; it’s how you grow a business. Debt is generally cheaper than equity, and not as risky.
However, it’s a different picture as far as unsustainable debt is concerned. Debt could be classed as unsustainable if the cost of debt maintenance is greater than incoming revenues, or the business is in serious tax arrears. In this situation, Mr Cranfield recommends clearing the debt before selling.
“Old debt or too much debt can be a problem. In all debt situations, a combination of a good business broker, accountant and lawyer will help make you investor-ready,” he said.
“It’s important to review your accounts and balance sheet and ensure your debts are at sustainable levels. Most of the time, the purchaser is buying the assets not the actual company, but debt levels are an indicator of performance.
“To maximise the sale price, you must work towards having that business running at peak performance. You don’t want your organisation to appear to be a distressed business. It’s all about maximising the multiple to get the best price.”
Getting your Tax in Order
With more than 25 years’ experience behind him, Mr Cranfield also stressed the importance of managing your tax situation in the lead up to a sale.
“I frequently come across situations where the business owner has already engaged potential purchasers but didn’t consider the tax situation,” he said.
“No-one wants to inherit your tax issues.”
And you don’t want to sell and then receive a huge tax bill, either. With the help of a good accountant, you can dramatically reduce the amount of tax you pay when you sell your business. It’s all about applying the right concessions.
Kevin Cranfield is Managing Director of Bentley’s Sydney practice and one of the organisation’s four founding directors. With more than 25 years in the profession, Kevin has acted as a professional advisor to a wide and diverse range of high-net-worth businesses and individuals, including those in agribusiness and primary production, property development, manufacturing and IT and communications. He also advises a range of businesses, including car dealerships, insurance brokers and not-for-profit organisations.