Recently I valued a business for a reader and he asked, “Is it common for the seller to finance?” Well, it’s not uncommon but it’s most commonly done for a family member or a long-term employee rather than a stranger. That brought up his other very common question about equipment loans. “Does the seller deduct the cost of the equipment loans from the selling price?”
Let me first say that there is what is usual and then there is what is negotiated. Anything can be negotiated so anything could be a condition of a sale, but let me start off with what I see as usual.
Usually our kinds of businesses are sold in an asset (or bulk) sale versus a stock sale. This is where the producing assets are sold to the buyer but the seller retains both the current assets (cash, accounts receivable, etc.) as well as current liabilities (accounts payable, taxes payable, etc.). In this scenario, usually equipment loans are assumed by the buyer but working capital loans are paid by the seller. That’s because the value is usually based on the amount of earnings and that is, in large part, based on the equipment deployed. Usually there is no question that equipment leases (and building leases) are assumed by the buyer (example: as on digital output device) so the same applies to productive equipment that is financed as well.
Working capital loans (loans not specifically against a specific asset such as equipment) are usually paid by the seller because they support the current assets retained by the seller in an asset (or bulk) sale. However, as I said, anything can be negotiated so it really depends on the parties’ agreement.
In a stock sale the loans stay with the corporation just as they would if you sold your shares of General Motors to someone else. However, there are small business issues with stock sales so it is less common. What kind of issues? Well, continuation of potential liabilities (taxes and environmental damage liability mainly) and practical issues such as assuming someone else’s accounts receivable. An asset (or bulk) sale normally sets up a firewall between the buyer and seller so that unexpected liabilities don’t pass through the transaction.