Selling a business that has debt

A business with debt can be sold, and the debt does not reduce what the business is worth — it reduces what reaches you. A multiple applied to profit produces enterprise value: what the whole operating business is worth to a buyer, before anyone asks who owns it or who it owes. What you walk away with is equity value: enterprise value, minus the debt, plus any surplus cash left in the company. The gap between those two numbers is the single thing that surprises sellers most, and the rest of this page works it through with figures you can re-key.

Enterprise value and equity value are two different numbers

Almost every valuation method a small business owner meets — a multiple of profit, a multiple of EBITDA, a multiple of seller’s discretionary earnings — produces the same kind of answer. It values the trading operation: the customers, the contracts, the staff, the equipment, the reputation, the earnings those things generate. It does not know, and does not care, how that operation was financed. A haulage firm earning £180,000 a year is worth what it is worth whether the lorries were bought with cash, a bank loan, or hire purchase.

That number has a name. It is the enterprise value. It is what the business is worth as a going concern, debt-free and cash-free, on the day it changes hands.

What you receive is a different number, and it has a different name. The equity value is what is left for the owner of the shares once the people the business owes money to have been settled, and once anything the business owns that the buyer is not buying — typically cash sitting in the account beyond what the business needs to run — has been handed back to you.

Equity value = enterprise value − debt + surplus cash

Work it on a real shape. A business is agreed at an enterprise value of £900,000. It has a bank loan with £250,000 outstanding, and there is £40,000 sitting in the account over and above what the business needs to trade.

Now take exactly the same business and remove the debt. Same customers, same profit, same enterprise value of £900,000 — but nothing owed:

The enterprise value did not move by a penny. The business is worth the same in both columns, because it earns the same in both columns. The difference of £250,000 is entirely a difference in who gets paid out of the sale proceeds — the lender first, the seller second.

This is the sentence worth holding on to: debt does not make a business less valuable, it makes the seller’s share of the value smaller. That distinction matters practically, not just semantically. An owner who believes debt has damaged the value of the business will often accept a worse multiple on the way in, on the assumption that the business is somehow compromised. It is not. The multiple negotiation and the debt deduction are two separate conversations, and conceding ground in the first because of a fact that belongs in the second is how sellers lose money twice over.

It also cuts the other way. Because the deduction is mechanical and arithmetic, it is very hard to argue about. A buyer who has agreed an enterprise value cannot then also argue the business is worth less because of the loan — they have already taken the loan off. Sellers who understand this stop apologising for the balance sheet and start defending the multiple instead, which is where the real money is.

One more consequence, and it catches people out constantly. Paying the debt down out of the company’s own cash immediately before completion does not improve the outcome, because it moves money from one side of the sum to the other. Suppose the seller uses the £40,000 of surplus cash to reduce the loan to £210,000 the week before completion:

Identical. The cash was already yours under the first structure; it is still yours under the second, just delivered through a smaller deduction rather than a separate addition. The only ways to genuinely change the equity value are to raise the enterprise value, to repay debt out of money that was never the company’s in the first place, or to stop the company generating new debt-like items between now and completion. Rearranging the company’s own balance sheet in the final fortnight achieves nothing except an awkward conversation with the buyer’s accountant about why the numbers moved.

If you have not yet put a defensible enterprise value on your own business, that is the first job, and it is covered separately in how to value a small business.

Debt gears your proceeds: a small move in the multiple is a big move in your money

Once debt is in the picture, every movement in the multiple lands on a smaller base, so it hits proportionally harder. The debt deduction is a fixed amount; your proceeds are what is left after it. That means the percentage swing in what you receive is always bigger than the percentage swing in the price.

Take the same haulage business: £180,000 of adjusted profit, a bank loan of £250,000, surplus cash of £40,000. Net debt is therefore £210,000 (£250,000 owed, less £40,000 of cash coming back). Here is the enterprise value at a range of multiples, and the equity value each one leaves:

Read the middle of that table carefully. Moving from 4.0× to 5.0× raises the enterprise value from £720,000 to £900,000 — a rise of £180,000, which is 25% more. But the equity value moves from £510,000 to £690,000, and £180,000 on a base of £510,000 is 35.3% more. The same £180,000 of extra price is a 25% improvement in the price and a 35.3% improvement in what the seller receives, because it is measured against the smaller number that actually reaches them.

£180,000 ÷ £510,000 = 0.353, or 35.3%

The same gearing works in reverse, and this is the part worth being uncomfortable about. Half a turn off the multiple — 5.0× down to 4.5× — is a 10% reduction in enterprise value and a £90,000 reduction in your proceeds, which on £690,000 is 13.0%. Sellers routinely spend weeks arguing over a £15,000 stock adjustment and then concede half a turn on the multiple in a single phone call, because the multiple feels abstract and the stock feels concrete. On these figures the half turn is six times the money.

Two practical consequences follow.

• The more debt there is, the more the multiple matters. Dropping from 5.0× to 4.5× costs £90,000 either way, but measured against what the seller receives it is an 11.1% loss on a debt-free £810,000, a 13.0% loss on £690,000 after £210,000 of net debt, and a 20.0% loss on £450,000 if the net debt were £450,000 instead. The same half turn, three very different outcomes.
• Improving the profit figure is worth the multiple, every time. At 5×, finding £20,000 of genuinely non-recurring or owner-specific cost that belongs as an add-back raises the enterprise value by £100,000, and every penny of that lands on the equity value because the debt deduction does not change. Which profit figure the multiple is applied to is the whole argument, and it is set out in SDE vs EBITDA.

None of the multiples above are a suggestion of what your business is worth. They are a range chosen to make the arithmetic legible. What multiple applies to a real business depends on its sector, its size, how concentrated its customers are, how much of it depends on the owner, and who is buying — and the only honest way to find yours is to work your own figures and test them.

Asset sale or share sale: who the debt follows

There are two fundamentally different ways to sell a limited company, and the difference decides where the debt ends up. This is a structural point, not a legal opinion — the documents that make either one happen are a solicitor’s job, and the choice between them has consequences well beyond the debt that you and your accountant need to look at together.

The trap in an asset sale is that sellers hear “the buyer is not taking the debt” and assume this is a worse outcome. It is not automatically worse or better — it is the same arithmetic wearing different clothes. Run it.

Same business. In a share sale the buyer pays £690,000 for the shares and inherits a company with a £250,000 loan and £40,000 of cash. In an asset sale the buyer pays the company £900,000 for the trade and assets, because they are taking the operating business unencumbered:

The same £690,000. The debt was settled either way; the only question was whether it was settled by the buyer paying you less, or by the company paying it off out of a larger cheque. What genuinely differs between the two routes is everything else — how the money gets from the company to you, what happens to the remaining shell, what warranties you give, how contracts and people move across, and the tax treatment of each. Those are not arithmetic questions and this page does not answer them. They are precisely the questions to put to an accountant and a solicitor, and the answer is often worth more than the negotiation over the multiple.

One thing worth knowing in advance: a lender that is secured on specific assets will usually have a say in whether those assets can be sold out of the company at all. Finding that out in week one of the process, rather than in week nine, is the difference between structuring a deal around it and losing a buyer to a delay nobody could explain. The general sequencing of all this is covered in how to sell a business.

Personal guarantees: the part that outlives the sale

Everything above is about the company’s money. A personal guarantee is about yours, and it is the one item on this page where getting it wrong does not cost you a percentage — it can cost you the sale proceeds and then some.

A personal guarantee is a separate promise, given by a named individual, to pay a company’s obligation if the company does not. Small-business owners sign them constantly and then forget them: to get a bank facility over the line, to take a commercial lease, to open a trade account with a key supplier, to get equipment finance approved, sometimes to secure a card processing arrangement. They are frequently signed years before anyone was thinking about selling, often as a single page inside a much longer pack.

Here is why it matters so much at a sale. Selling the company does not, by itself, do anything to a promise you personally made. The guarantee is an agreement between you and the lender or landlord or supplier. The buyer is not a party to it. Changing who owns the shares changes nothing about a document with your signature on it and not theirs. Whether a specific guarantee falls away, gets released, gets replaced or simply carries on is a question about what that particular document says and what the party holding it agrees to — which makes it a matter for a solicitor, and one to put in front of them early rather than late.

What is not a legal question is the shape of the risk, and it is worth being blunt about it:

• You can sell the business and still be on the hook. If the guarantee is not dealt with, you have handed control of the business to someone else while remaining personally exposed to what it owes. You now carry a risk you can no longer manage, because you are no longer running the company that determines whether the risk crystallises.
• A buyer promising to sort it out is not the same as it being sorted out. An undertaking in the sale agreement that the buyer will procure your release is a promise from the buyer. The release itself has to come from the party who holds the guarantee. Those are two different things, and only one of them ends the exposure.
• It is not only bank debt. Landlords and trade suppliers hold them too, and lease guarantees in particular can run for years. Sellers who check with the bank and stop there routinely find a second one later.
• The debt being repaid at completion usually helps, but does not automatically close the file. A facility that is paid off and formally closed is a different situation from one that is merely at a zero balance with the arrangement still live. The distinction is in the paperwork.

The practical step, and it costs nothing, is to build the list now. Go through every finance arrangement, every lease, every trade account with meaningful credit, every invoice finance or asset finance agreement, and write down: who the counterparty is, what is outstanding, whether a personal guarantee was given, by whom, and where the signed document is. Most owners doing this honestly find at least one they had forgotten. Better to find it in month one of preparing, when there is time to ask the counterparty what a release would require, than in the week before exchange, when the answer “we would need to review that” can stall a completion.

Then hand the list to a solicitor and let them tell you what each one means. That is the correct division of labour: you assemble the facts, because nobody else can, and they read the documents, because that is the bit that needs qualified judgement and is genuinely a legal matter rather than an arithmetic one.

Cash-free, debt-free, and the debt-like items you did not expect

“Cash-free, debt-free” is the phrase a buyer’s adviser will use, usually without explaining it, and it makes sellers nervous because it sounds like something is being taken away. It is not a demand. It is simply the convention that the price is being quoted for the operating business, and that the cash and the debt get settled separately on top.

In plain English it means three things:

• The headline number is the enterprise value — the business as a working machine.
• Debt is deducted from it, because the buyer is taking on the obligation to repay.
• Cash is added back to it, because the buyer is not buying your bank balance.

There is a fourth element that usually rides alongside it: a normal level of working capital. The buyer is paying for a business that can trade on Monday morning. That means a normal amount of stock on the shelves and a normal amount of money owed by customers, less a normal amount owed to suppliers. If the business is handed over with materially less working capital than normal, the buyer has to inject cash on day one simply to keep it running, and they will want the price adjusted for that. If it is handed over with materially more, the same logic runs in your favour. Agreeing what “normal” means — usually by looking at the actual monthly figures over a period long enough to cover the seasonal swings — is a negotiation worth having early, because it is far harder to have it once one side has a number they like.

Now the part that catches sellers cold. The word “debt” in a deal is not limited to things labelled as loans. A buyer’s adviser will look for anything that behaves like debt: an obligation the business has already incurred that will have to be met with cash after completion, without generating any new revenue to pay for it. Each one they successfully argue is a pound off your equity value.

Take the same business, agreed at an enterprise value of £900,000, where the seller has been budgeting on £690,000. Here is what a thorough buyer comes back with:

Run it out:

£900,000 − £380,000 + £40,000 = £560,000

The seller expected £690,000 and is being shown £560,000. That is £130,000 of difference, arriving late in a process, at the exact point when the seller is most tired and most committed. Nothing in that table is a trick. Every line is a real obligation that a real buyer will really have to fund. But four of the six lines were invisible to the seller because they do not appear on the loan statement, and the £130,000 is 18.8% of the number they had been planning their retirement around.

£130,000 ÷ £690,000 = 0.188, or 18.8%

The defence is not to argue the items away — most of them are defensible and arguing badly just costs credibility. The defence is to find them first, so that nothing on that list is news. Some are within your control to reduce before you go to market: supplier payments can be brought back to terms, leave balances can be run down through the year rather than accumulated, deposits can be matched against the costs they are meant to cover. Others simply need to be in your own model from day one, so that your expectation is £560,000 and every item is a line you raised rather than a line that was sprung on you.

The underlying asymmetry is worth naming. The buyer’s adviser does this for a living and has a checklist. The seller does it once. That is not an argument for feeling hard done by; it is an argument for building the same list yourself, in advance, which is entirely doable because you are the one who knows where the obligations are buried.

What to do before you go to market

None of this requires a decision to sell. It requires knowing the number, which is useful whether you sell next year, in five years, or never.

1. Work out the enterprise value first, and keep it separate. Apply a multiple to your adjusted profit figure and hold that number on its own, untouched by any question of what the business owes. This is the number you will negotiate, and it deserves its own defence — the free business valuation calculator produces it from your own figures, in your browser.
2. Build the full debt-like list, not the loan list. Everything with a repayment schedule, everything owed to you as a director, supplier balances beyond normal terms, accrued leave, customer money taken for work not yet done, dilapidations or make-good obligations on premises, anything deferred. Write the amount next to each. Assume a buyer will find all of it, because a good one will.
3. Work out what is genuinely surplus cash. Not the bank balance. The balance less what the business needs to pay next month’s wages, its suppliers and its own obligations without borrowing. The difference between those two figures is frequently smaller than owners expect.
4. Do the sum, and do it three times. Enterprise value, minus the full debt-like list, plus surplus cash. Then run it again at half a turn lower on the multiple, and again with every debt-like item argued at the buyer’s figure rather than yours. If the worst of those three numbers does not work for you, you have found that out for free, with time to do something about it.
5. List every personal guarantee, then take the list to a solicitor. Counterparty, amount, who signed, where the document is. This is the item most likely to cause a problem at completion and the one most easily started today.
6. Fix what is fixable, early. Supplier payments back to terms. Leave taken rather than banked. Director’s loan positions understood. Debt schedules and their end dates written down. Twelve months of doing this quietly changes the arithmetic materially; twelve days does not.
7. Then bring in the professionals for the parts that are theirs. Structure, warranties, guarantees and tax treatment are for a solicitor and an accountant. Arriving at that conversation with the arithmetic already done makes it shorter, cheaper and considerably better informed.

The thing to take away is the one the first section started with. Debt is not a stain on the business. A profitable business that borrowed to buy the equipment that generates the profit is a normal business, and it will sell. What debt does is sit between the value of the business and the money that reaches you, and the only real mistake is not knowing how much of it is sitting there until a buyer’s adviser tells you.

Arithmetic and general information only — not financial, tax, legal or investment advice. Your own figures, and your own accountant, decide what any of this means for you.

Frequently asked questions

Can you sell a business that has debt?

Yes. Debt is a normal feature of a trading business and does not stop a sale. What it changes is the money that reaches you rather than the value of the business itself: a multiple applied to profit produces the enterprise value, and what the seller receives is that enterprise value less the debt plus any surplus cash left in the company.

What is the difference between enterprise value and equity value?

Enterprise value is what the trading business is worth as a going concern, before considering how it was financed, and it is what a multiple of profit produces. Equity value is what is left for the shareholder after the debt is taken off and surplus cash is added back. On an enterprise value of 900,000 pounds with 250,000 pounds of debt and 40,000 pounds of surplus cash, the equity value is 690,000 pounds.

Does debt reduce what my business is worth?

No. It reduces your proceeds. The same business is worth the same enterprise value whether the equipment was bought with cash or with a loan, because it earns the same either way. With 250,000 pounds of debt the seller receives 690,000 pounds on a 900,000 pound enterprise value; with no debt the seller receives 940,000 pounds. The business is identical in both cases.

What does cash-free, debt-free mean when selling a business?

It means the headline price is being quoted for the operating business on its own. Debt is then deducted from it because the buyer takes on the obligation to repay, and cash is added back because the buyer is not paying for your bank balance. A normal level of working capital is usually agreed alongside it, so the buyer receives a business that can trade from day one.

What happens to a personal guarantee when I sell my business?

A personal guarantee is a promise you personally made to a lender, landlord or supplier, and selling the company does not by itself change an agreement the buyer is not a party to. Whether any particular guarantee is released, replaced or continues depends on what that document says and what the party holding it agrees to, which makes it a matter for a solicitor. List every guarantee you have given early in the process rather than late.

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