Business short sale

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May 27, 2010 by Kendric Foultz

What do you do as a business owner if your business is in an impossible situation and is taking you down with it?  Depending on the ownership structure, you may be able sell it in what essentially looks like a real estate short sale or otherwise known as a “pro rata escrow”.

If your business has lots of assets or if you look at it from a debt free standpoint and it’s profitable, then there is a good chance that someone would want to buy it.  So how do you take a business that is laden with debt and turn it into a debt free enterprise?  The key is understanding creditor positioning in a bulk sale.  Basically when a business is sold and there is not enough cash in the transaction to pay off the creditors and less consideration in the purchase than the indebtedness, then the creditors are paid off according to a state schedule.  This usually amounts to the creditors receiving a fraction of the amounts owed or nothing at all, but leaves the business in a much stronger position to survive.  Usually this allows the business to maintain its employees, service its clients, purchase from its vendors, etc.  This is a far better outcome than having the business simply collapse and go bankrupt.

So what happens to the business owner in this process?  In most cases there is little if any cash going to the owner and the creditors could still pursue the owner for the balance of the debts, but again it is likely a better way to go than bankruptcy for the business and there may be some advantages to the owner as well.  The key to this process is to find a knowledgeable bulk sales escrow company and retain the services of a good business law attorney to help you navigate these waters.  Having a business broker who understands this process is a must as he or she will be able to properly articulate the value proposition to the buyer and get the most out of the transaction for the business owner.

Business Sales Process, How to Sell

Logos Member of the California Association of Business Brokers Member of the International Business Brokers Association Member of the M&A Source Holder of the Merger & Acquisition Master Intermediary designation, M&A Source's highest qualification Holder of the Certified Business Intermediary designation, IBBA's highest qualification Holder of the Certified M&A Professional designation from Coles College Trained by the National Association of Certified Valuators and Analysts to conduct business valuations