M&A Smooth Selling: Pay Off Debt - dummies

By Bill Snow

One of the hurdles to getting an M&A deal done is long-term debt. Many Sellers either “conveniently” forget about the debt or hope/assume that Buyer will simply assume the debt no questions asked. Here’s a little bit of expert advice: That ain’t gonna work! The long-term debt of the business is Seller’s obligation.

Don’t despair if your business has unattractive long-term debt; you have some options: Retire that debt now, make a plan to retire that debt before closing, or retire that debt at closing.

Although Buyer can assume the long-term debt of an acquired company, Buyer will probably simply deduct the amount of debt from the proceeds of the sale. For all practical purposes, if Buyer assumes the debt, Seller is retiring that debt at closing.

If you’re worried that your company’s long-term debt may block a sale, here’s a tip for negotiating with the lending source. Call the lender, explain that a deal to sell the company is on the table but may be in jeopardy because of the company’s debt load.

Ask whether the lender would accept a percentage of the amount owed (60, 70, 80, or whatever) within a certain time period (such as 45 days) and then consider the debt paid in full if you meet those new terms.

Tell the lender that if you fail to meet the terms of this new agreement, your deal reverts to the original 100 percent. The lender, if it accepts the deal, gets the benefit of getting part of its money repaid right away (or in the near future), and if that immediate repayment doesn’t materialize, the lender hasn’t lost anything.

It’s an offer some lenders won’t be able to refuse. If the lender agrees to this gambit, be sure to memorialize the agreement in writing.