How Much Debt is Acceptable When Selling Your Business?

When it comes to selling a business, one of the key factors that buyers will consider is the amount of debt your company carries. Debt is a normal part of business, but the level of debt can make or break a deal.

So, how much debt is acceptable when selling your business? Let’s break it down in simple terms!

Understanding Debt Ratios

First off, buyers are looking for companies that can stand on their own feet financially. When determining what debt is acceptable, the most important factor is the debt-to-equity ratio.

This ratio compares your company’s total debt to its shareholders' equity. A higher ratio can signal that your company is more leveraged and carries more risk, which may scare off potential buyers.

What’s a Safe Range?

• Low Risk: A debt-to-equity ratio under 1:1 is generally seen as low risk. Buyers tend to feel more confident about purchasing a business with low or manageable debt because it shows stability.

• Moderate Risk: Ratios between 1:1 and 2:1 might be acceptable but could raise some eyebrows. Buyers may ask for more information or insist on a lower price to offset the risk.

• High Risk: Anything over 2:1 is often considered high risk. This could deter buyers or force them to offer much less for your business to account for the financial burden.

  
  

Debt Types Matter Too

Not all debt is created equal! There’s a big difference between good debt (e.g., loans used to purchase equipment that helps the business grow) and bad debt (e.g., high-interest credit lines or personal loans tied to business expenses). Buyers will look at the nature of the debt and how it impacts the business’s operations.

• Good debt is generally acceptable because it helps the business generate more revenue.

• Bad debt may cause buyers to hesitate or back away from the deal entirely.

  
  

How Does Debt Affect the Sale Price?

More debt usually means a lower sale price. Why? Because potential buyers will factor the debt into their decision-making. They’ll often subtract the debt from the business’s valuation or ask for a price reduction to cover the risks.

On the flip side, if your business has minimal debt, buyers may be willing to pay more, knowing they won’t be weighed down by financial burdens after the sale.

What’s the Bottom Line?

Debt isn’t a dealbreaker if managed well. The key is to ensure that your debt level is reasonable and clearly communicated. The more transparent you are about your business’s finances, the more comfortable buyers will feel.

If you’re planning to sell and need advice on managing your business debt for the best sale price, Catalyst is here to help! Book your consultation today and get expert advice on how to set up your business for a smooth and profitable sale!