I'm selling my small manufacturing business and one buyer wants to structure the deal so they assume the company's existing debts. I need to know what I should be checking before agreeing to that. I don't want to end up on the hook for something down the line if the buyer defaults or if a lender says the assumption wasn't valid. What should I be looking at?
Debt Assumption
Everything to check before letting a buyer assume your business debts
First thing I'd check is whether the debts are even assumable. A lot of commercial loan agreements have clauses requiring lender consent for any transfer or assumption. If the lender won't consent, the whole structure falls apart.
What muddyboots88 said. Also look at the exact language in each loan document. Some say 'assumption' but actually mean the original borrower is still fully liable until the debt is paid off. You want a full release, not just a consent to assume.
Are you selling the business assets or the entity itself? If it's an asset sale, the debts usually stay with the entity unless the buyer formally assumes them. If it's an entity sale, the debts go with the entity automatically. The structure matters a lot here.
It would be an entity sale. The buyer would take over the LLC and assume its liabilities. That's why I'm tryying to map out the risk. My main worry is that if the buyer stops paying, the lenders come back to me because my name is still on the personal guarantee.
If you have personal guarantees, the lender can come after you regardless of who owns the entity now. Unless the lender explicitly releases you from the guarantee. That release has to be in writing and signed by the lender. Don't rely on the buyer's promise to pay.
Check for any cross-default clauses too. If the buyer assumes one loan and misses a payment on another debt they brought in, it could trigger a default on the assumed loan. That's a common trap.
Also check the buyer's financials. If they're assuming debt, the lender will want to see they can service it. But you should look at it from your own risk perspective. If the buyer is thin on cash, the odds of default go up and you might get dragged back in.
One more thing: look at whether any of the debts have covenants or reporting requirements that Could be triggered by the ownership change. A change of control can be an event of default under some agreements, even if the debt is assumed.
This is helpful. I'm going to pull all the loan documents and check for assumability, personal guarantees, and change of control language. I hadn't thought about cross-default. I'll ask the buyer for financials too, even if the lender does their own review.