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. Read on to learn more about when selling your business might be a viable option, the pros and cons of selling your business, and other possible alternatives for dealing with small business debt.
In order to sell your business you have to locate a 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. (To learn more about selling a business, see the articles in Buying or Selling a Business.)
Unfortunately, you might not be able to find a buyer for your business. If your business has consistently been losing money, has more debts than assets, or if the market conditions are not right you might have a difficult time finding a buyer to invest in 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. (To learn when you might be personally liable for business debts, see Are You Personally Liable for Business Debts?)
There are many upsides to selling your business as opposed to filing for bankruptcy.
A business sold as a going concern—an active business that will not 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 may 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 one lump sum to pay off all business debts.
Alternatively, the buyer may wish to pay less but assume some or all debts of the business. But keep in mind that if you were personally liable for certain debts, your obligation will not be eliminated unless the creditor agrees to release you.
Below are some of the downsides of selling your business.
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 does not 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.
By selling the assets of the business yourself, you can obtain a better price for them than a bankruptcy trustee. This means more money to pay off creditors with. Because you get to keep the excess proceeds after paying off creditors, this option can be an attractive alternative if your business has a lot of assets.
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 may receive even less. But the IRS might consider such a settlement a benefit similar to income so it may 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 are not 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 are 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 the debt you are still on the hook if it is not paid.
If you're considering selling or liquidating your business and also want to learn the pros and cons of filing for bankruptcy, consider talking to an attorney.