Debt comes out of your proceeds, not the buyer's pocket
Almost every offer is made on a cash-free, debt-free basis. That single phrase means the seller keeps the cash in the business and settles the debt out of the purchase price. The buyer receives a business with neither.
So a $2,000,000 offer on a business carrying $380,000 of bank debt is not $2,000,000 to you. The debt is repaid at closing from the proceeds, and what reaches you is what is left after that and everything else in the bridge.
| Line | Item | Amount |
|---|---|---|
| Offer | Enterprise value | $2,000,000 |
| Add | Cash retained by seller | $140,000 |
| Less | Bank term loan payoff | ($380,000) |
| Less | Equipment finance and capital leases | ($62,000) |
| Less | Prepayment penalty | ($9,000) |
| Less | Transaction costs | ($118,000) |
| Before tax | Cash to seller | $1,571,000 |
Many term loans carry a prepayment charge, and equipment finance frequently does. Ask your lender for a written payoff quote before you list, not during closing — it can be several thousand dollars, and occasionally it is a percentage that makes early payoff genuinely expensive.
Not all debt behaves the same way
| Type | At closing | What to check |
|---|---|---|
| Bank term loan | Repaid from proceeds | Payoff amount, prepayment penalty, lien release |
| SBA 7(a) loan | Repaid; assumption is possible but rare | SBA consent required for any assumption |
| Line of credit | Repaid and closed | Whether the borrowing base has been fully drawn |
| Equipment finance | Repaid or assumed with consent | Whether title passes on payoff |
| Capital leases | Usually treated as debt | Assignability, and the residual |
| Shareholder loans | Repaid or forgiven | Tax treatment of forgiveness differs sharply |
| Trade payables | Usually stay with working capital | Not debt, unless materially overdue |
| Accrued taxes | Commonly treated as debt-like | A negotiation point, and worth having early |
The bank loan is obvious. What counts as debt-like is negotiated, and buyers push to expand it — deferred revenue, accrued vacation, an overdue payables balance, a disputed tax assessment. Each item moved into that column reduces your proceeds dollar for dollar. Get the definition agreed in the term sheet rather than in the definitive agreement.
Paying off, or having the buyer assume
Payoff is the default and the simplest. Assumption — where the buyer takes over the existing loan — is occasionally attractive if the rate is well below market, but it is harder than it sounds.
- The lender must consent, and they are underwriting a new borrower. That is a full credit process, not a formality.
- SBA loans require SBA consent in addition to the lender's, which adds time and is frequently declined.
- Your personal guarantee usually survives unless the lender expressly releases it — which is the point most sellers miss.
- Assumption reduces the buyer's financing need, which can widen your buyer pool if the rate is genuinely good.
- Below-market debt has value, and a buyer benefiting from it should be paying something for it in the price.
Selling the business does not release you from a guarantee you signed. If the buyer assumes the loan and defaults two years later, an unreleased guarantee means the lender can still come to you. Insist on a written release from the lender at closing, and have your attorney confirm it covers all obligations, not just future advances.
Liens, and delivering clean title
A buyer is purchasing assets free of encumbrances. Every lender with a security interest has filed a financing statement, and every one of those has to be released or subordinated at closing. This is mechanical, slow, and it stops closings when it starts late.
Run your own lien search
A UCC search in your state and county. Owners are regularly surprised by filings from a lender they paid off years ago and never had terminated.
Request payoff letters
Written, dated, with a good-through date and per-diem interest. Lenders take one to three weeks.
Confirm release mechanics
Who files the termination, when, and how the buyer's lender is satisfied. Escrow usually handles it.
Simultaneous payoff and release
Funds flow to the lender and terminations are filed. This is why closings are choreographed rather than casual.
A financing statement from a loan repaid in 2019 that was never terminated still shows on a search. It is not a debt, but it is a title problem, and resolving it means getting a signed termination from a lender who may have merged twice since. Find these months before closing, not the week of.
When the debt exceeds what the sale will cover
If payoff plus transaction costs exceeds the price, the sale cannot close in the ordinary way. This is more common than owners expect, particularly where the business borrowed against a valuation that has since compressed.
- Negotiate a discounted payoff. Lenders facing a shortfall on a liquidation sometimes accept less on a going-concern sale. This requires a credible alternative and a real conversation.
- Contribute personal funds to bridge the gap, if a clean exit is worth it.
- Structure a seller note that partially defers your proceeds, letting the cash at closing cover the payoff.
- Sell assets separately to reduce the debt before marketing the operating business.
- Consider whether now is the moment. A year spent paying debt down can change the outcome entirely, if the business supports it.
The worst version of this is discovering it during closing, when your leverage is gone and the buyer knows you cannot walk away.