What Happens To Business Debt When A Company Is Sold

July 5, 2022

Knowing how to handle business debt when a company is sold is essential. In particular, you need to know what happens to your accounts receivable and accounts payable when one of your customers decides to sell their business. You should think about protecting your business from potential liabilities resulting from the sale.

Unfortunately, most business owners don’t consider what could happen to their business debt when a company is sold. Although there are instances where the debt is absorbed in the sale as part of the transaction, you shouldn’t presume that it will be fully recovered in the process.

Note that a business sale can have a significant impact when it comes to recovering the money owed to your business. Debt management experts at Niche Trade Credit explain the basics of what happens to business debt when a company is sold.

Understanding the Most Common Sale Structures

There are two basic types of business sale structures in Australia. Read on to know what they are and how each approach recognises debt at closing.

Stock Sale

A stock sale is where the purchaser takes over everything a business owns, including shares, assets, and liabilities. Once the buyer acquires the business, they assume full responsibility for the company by virtue of being the new owner. For example, if a company sold in a stock sale has an outstanding debt, the new owner would now be held accountable for that business debt.

Typically, a stock sale is complex, time-consuming, and pretty costly to assess the risks involved with each business liability. For that reason, they are often used for large, established firms. Small business purchasers may lack the necessary resources and financial muscle to handle such transactions. Thus, most small deals are classified under asset sale transactions.

Asset Sale

In an asset sale, specific assets and liabilities are transferred between the buyer and seller. This method of business sale isn’t that straightforward because it permits the transfer of certain assets while limiting others.

Based on circumstances, asset sale transactions vary greatly and are subject to negotiation. A major concern in an asset sale is that you may be unable to tell who owes you money, which is why you should try to recover your outstanding business debts.

How to Safeguard Your Business When a Company Is Sold

  • Don’t extend credit until the company is sold – If the company can pay upfront, we suggest you stop offering credit until the sale is closed. This will help manage your collectible payments.
  • Keep up with your customers – Staying aware of your customers’ status can let you know their next move.
  • Recover outstanding invoices – It’s also important to follow up on the outstanding invoices with the business’s new owner.Hire a debt collection and recovery service – Another way to protect your business against bad debt is by hiring a debt collection and recovery firm to help you recover the money you’re owed.

Protect Your Business with Niche Trade Credit

Whether you’re buying a business or a customer is selling their business, it helps to find ways to recover outstanding debts if you’ve been selling goods and services on credit. The trade-credit insurance brokers at Niche Trade Credit can help your balance sheet and your business. We offer the best credit insurance services and debt collection and recovery solutions to protect your business.

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