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Selling Assets or Company Ownership for Urgent Business Debt Repayment

 

Selling Assets or Company Ownership to Repay Urgent Business Debt

As a business owner, you may find yourself in a situation where you need to quickly repay urgent business debts. While taking on debt can be a normal part of doing business, having more debt than your company can reasonably handle puts you in a precarious position. When facing high debt burdens, business owners often look to selling assets or even company ownership as a way to raise funds for urgent debt repayment.

Strategies for Selling Assets or Ownership

Selling select company assets – If your business has valuable assets like real estate, equipment, inventory, or intellectual property, selling these assets can generate cash for debt repayment. You retain ownership and continue operating the business.

Selling full ownership – Selling the full ownership of your company through an acquisition exits you from the business entirely. The buyer takes on your assets and liabilities.

Majority sale – You can sell a controlling majority stake of your company, typically 51% or higher. This brings in capital while still retaining a minority portion of the business.

Minority sale – Selling a minority stake, like 30% of the company, generates funds though you maintain control as the majority owner.

These options allow you to raise funds quickly through asset sales or ownership transfers. The approach depends on factors like how much cash you need, whether you want to retain control, and the value of assets versus full business value.

What Happens to Debt in an Asset or Ownership Sale?

To understand how selling assets or ownership impacts your debt, you first need to know how a transaction can be structured:

– Asset sale – The buyer purchases specific assets. Your company retains the unsold assets and existing liabilities.

– Stock sale – The buyer purchases stock to gain full company ownership. This transfers both your assets and liabilities to the new owner.

In an asset sale, you raise funds but stay saddled with remaining debts. Stock sales transfer debt obligations to the buyer, providing a cleaner break.

There are exceptions, however. Certain debts tie directly to assets and must be handled specially:

– Leased equipment – Any sale of leased equipment requires settling the attached lease first.

– Successor liability – Buyers can still be liable for certain debts like taxes, contracts, and product liabilities.

Work closely with legal counsel to appropriately deal with asset-tied debt and successor liability risks when structuring your transaction.

Options for Handling Debt in a Sale

When selling assets or ownership interests, you have options in how debt gets addressed:

Pay off debt at closing – This fully resolves debt using sale proceeds. It maximizes the cash you walk away with.

Assume debt – A buyer takes over your debt obligations. This works for stock sales or where debt ties directly to assets.

Negotiate discounts – You may negotiate with lenders for discounted payoffs. This saves money but requires lender consent.

Debt assumption with indemnity – A buyer assumes debt, but you indemnify them against future losses.

Include earn outs – Earn-out provisions have you forward sale proceeds to the buyer when received.

Obtain seller financing – The buyer pays the purchase price to you over an agreed term.

Which option works best depends on deal structure, debt levels, and buyer preferences. Explore all avenues to optimize treatment of debts in the transaction.

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