If you're struggling with small business debt, selling your business is one alternative to filing for bankruptcy. But it's not always easy to find a willing buyer. Whether someone will be willing to buy your business depends on its profitability, assets, liabilities, and overall market conditions.
When 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. However, if your business has consistently been losing money, has more debts than assets, or the market conditions aren't right, you might have difficulty finding a buyer to take on 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.
Here are some upsides to selling your business.
A business sold as a "going concern" (an active business that won't 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 might 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 a lump sum to pay off all business debts.
Alternatively, the buyer might want to pay less but assume some or all debts of the business. However, keep in mind that if you're personally liable for certain debts, your obligation won't 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.
Selling the business doesn't eliminate your liability if you're personally liable for business debts. 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 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 business's assets yourself, you can obtain a better price for them than a bankruptcy trustee. So you'll have more money to pay off creditors. Because you get to keep the excess proceeds after paying off creditors, this option can be an attractive alternative if your business has many assets.
Liquidating the business lets you 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 debt balance because litigation is expensive, and they don't want to push you into bankruptcy where they might receive even less. However, the IRS might consider such a settlement a benefit similar to income, which could 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 aren't 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, settle and pay off the debts you're 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 them, you're still responsible if they're not paid.
If you're considering selling or liquidating your business and want to learn more about the pros and cons of filing for bankruptcy, consider talking to an attorney.