When purchasing a business, do you acquire the past business debt as well?

I am planning on purchasing a limousine business and I know that the business has debt. Will I be acquiring the debt as well or is this is something that the current owners will have to deal with before or after selling to me?

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5 Responses to “When purchasing a business, do you acquire the past business debt as well?”

  1. joseph.foust said:

    Either they will have to pay it off, or you will inherit it!

    Think about it, if you were in business already, and owed A LOT of money, and could make it just “vanish” by selling the business to someone else (your brother, maybe?). then wouldn’t you do that every time a bill came in?

  2. Dr. Wu said:

    It depends on the type of debt the current owners have. If it is debt in the name of the business, then you may be responsible for it if you buy the business as is. Generally you start your business under a different corporate name and then use a DBA with the operating name of the business. It could be the same or something similar to the current name of the business you are buying.
    You may just be able to buy the assets, the limos, and not the debt. If the debt is in the name of the owners than you would not be responsible for it unless it is part of the deal. I would not do this deal if you have to assume any debt.

  3. CB-in-Tokyo said:

    Yes, of course you will be. That is part of the value of the business.

    Carrying debt can actually have a positive effect as it works as a tax shield (depending on the debt). Also if you are a new business an incapable of getting loans, acquiring existing debt can be a good thing, however, the debtors may have covenants saying that the debt needs to be repaid in the even of a change of ownership.

    I think you need to seriously look at how you have valued the company. If you have valued it properly, then the debt is already considered. If you haven’t even valued it, you are likely heading into a world of hurt.

    You need access to their financial statements and to value the future sales projections. This can be very complex, and it is likely worth the time and expense of hiring someone to do this.

    Or you can start here and be prepared to do a lot of research.

    http://www.score.org/article_business_valuation_101.html

    http://en.wikipedia.org/wiki/Business_valuation

    If you start reading about a WACC, then instead use a rate of return that you feel you want to make on the business every year for discounting (like 10%, 12% etc.) make sure it is reasonable, as it basically stands for the amount you could have otherwise invested the money for.

    Or you can just gut feel it, and go for it, but I highly advise against it.

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