There are differing ways in which debtors and creditors may be dealt with when selling your business. Remember (see Step 1 of this Guide) that there is a difference between selling your business where you can choose and agree with the purchaser which parts of the business will be sold. This differs from the sale of a company where everything – all assets and liabilities pass to the buyer as these are all owned by the company. You can choose whether to sell the business (selected assets and liabilities) or the company, but you need to be clear on the implications and take advice including advice from your accountant.
These are the differing ways in which debtors and creditors may be dealt with when selling your business:
You retain Debtors on Sale of Business
If you are to retain the debtors of the business (i.e. those debtors as at the point of sale) then the buyer will want provisions in the business sale agreement restricting for example, the process by which you could take legal action against these debtors in the event of non payment. The reason being is that these debtors are likely to be customers of the business and the purchaser will obviously want to protect the ongoing goodwill of the business.
Buyer taking Debtors on Sale of Business
If you decide to agree that the buyer retains the debtors then it will be down to the buyer to collect, following the date of sale, all those debts due to the business on completion and these would be identified in the business sale agreement. In this scenario, unless you have agreed that the buyer will keep the debts owing to the business on completion of the sale, protections will be needed in the business sale agreement ensuring that payment is passed to you when received by the purchaser from these debtors following completion of the sale.
Which Liabilities will the Buyer take?
Any liabilities to be taken over by the buyer following completion of the sale would need to be clearly identified in the sale agreement. A buyer might want to take over certain liabilities such as trade creditors in order ensure he has full control of matters governing the everyday running of the business. However, a buyer would not normally want to take other liabilities such as bank loans or lease agreements.
What about employees?
Liabilities which would pass would likely include employment related liabilities, the subject of my next article on legal issues to consider when selling your business.
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