Growing a Franchise
Owing money doesn't have to stand in the way of selling a franchise. What matters is how those debts are handled and how much of the sale price goes toward paying them off.
Franchise owners considering selling their businesses may wonder what happens if they still owe money. Outstanding debt doesn't necessarily prevent a sale, but how much is owed and what type of debt it is can affect the terms of the transaction and how much money the seller takes home.
According to Amanda Paracuellos, founder and owner of Paracuellos Law Group, selling a business with debt is common. Paracuellos, a transactional attorney with 30 years of experience, regularly helps business owners, including franchisees, navigate the sales process.
“Yes, you can sell a business that has debt. Most businesses have debt, so this is very normal,” Paracuellos said. “The typical way that debt is addressed in a business sale is that the debt must be paid off using the purchase price.”
For example, if a franchise sells for $200,000 but the owner still owes $100,000 on an SBA loan, that loan would typically be paid off directly from the sale proceeds. The seller would receive the remaining $100,000, assuming there are no additional debts, fees or closing expenses.
The sale price isn't always what the franchise owner walks away with. Even if the business sells for its full asking price, outstanding debts can take a significant chunk out of the money the seller receives.
Not every type of debt is handled the same way during a franchise sale. While SBA loans and other outstanding balances may need to be paid off at closing, certain obligations can sometimes transfer to the buyer.
A seller with outstanding equipment financing may be able to transfer those payments to the buyer. In that case, the buyer takes ownership of the equipment and continues paying off the balance. Lease obligations and future franchise royalties may be handled similarly, assuming the necessary parties approve the transfer.
Of course, that doesn't mean a buyer will take responsibility for everything the seller owes. Some debts may have to be paid off at closing, and others can transfer only if the terms of the sale and the lender or franchisor permit it.
Paracuellos said one of the biggest misconceptions among sellers is that buyers will assume their outstanding debts. In many transactions, debts such as SBA loans reduce the seller's net proceeds dollar for dollar.
Before putting a franchise on the market, owners should have a clear understanding of their outstanding financial obligations. Knowing which debts must be paid off and which may transfer to the buyer can help sellers establish realistic expectations about the transaction.
Buyers will also want a complete picture of the business's financial obligations before agreeing to a purchase. During due diligence, they should review outstanding loans and other obligations to determine which debts will be paid off and which, if any, they will assume.
“Buyers want to make sure they identify all debts and liabilities during due diligence to make sure that debt is actually paid off,” Paracuellos said. “Buyers don't want to pay the full purchase price without knowing there is debt and then find out they might be liable for that debt after closing, on top of the purchase price they paid.”
For franchise owners preparing to sell, a few steps can help make the process easier:
So, can you sell my franchise if you owe money? Usually, yes. Having debt doesn't automatically rule out a sale, but you'll want to know how much you owe, what you'll have to pay off and whether your lender or franchisor needs to approve the transaction.
For more information on the costs and financial obligations involved in selling a franchise, check out these related articles on 1851 Franchise:
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