Hypothetical on buying a business with bad credit

Discussion in 'Growing and Managing a Business' started by Kay, May 1, 2010.

  1. Kay

    Kay
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    What happens if you take over a business and the business has any outstanding debts or credit issues? I just read something that made me wonder about that.

    If the previous owner has say had their company credit line revoked with a supplier, does that continue to show on a credit report that's in the business name and count against it, even though the business is under new ownership? Just curious. :)
     
  2. seanstevens

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    If the company is a legal entity in itself (i.e. not a sole trader) then in theory their bad credit history would be carried across. However, in the credit report the details of the purchase would be added and it would counter the bad history as obviously money would have been put into the company.

    The outstanding debts one is a different issue as it depends on the terms of the purchase. Increasingly I have seen more acquistions made on an asset basis only, leaving the debts behind in a dead company. If the whole company is bought then the debts are carried across and thus still open for payment and the new owners would be able to settle them immediately.
     
  3. Kay

    Kay
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    Thanks for that very detailed response, Sean! :) My mind wanders in weird ways sometimes. Makes me wonder why any buyer wouldn't just leave those debts behind if that option's open to them rather than shoulder the burden of them.

    I always assumed that you did buy only the assets anyway. Interesting. You learn something new every day. :)
     
  4. Fergal

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    I've been involved in the acquisition of some limited companies in Ireland. We worked with accountants during the acquisition and their advice was that all of the companies liabilities transfer over to the new owner. To echo what Sean said, a limited company is a legal entity and it's liabilities don't disappear, just because it has a new owner.

    It's worth noting that liabilities don't just include bad debts. For example, once the company has been taken over, a customer or employee could initiate a legal action for damages, arising from something that happened before the company was acquired. One of the main objectives of a due diligence is to identify any potential liabilities that may impact on the new owners.
     
  5. creditreport

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    Hey,
    Really great post for me . Thanks for sharing, Keep it up friend.
     
  6. rshughes

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    In the US, one can acquire only the assets of a business as Sean described, or one can purchase the stock of the company, as I believe what Fergal was describing. A stock purchase can be risky if there are hidden liabilities or debts, since they do "carry over" to the new owner, but in the past (or maybe now as well) a stock sale was more favorable to the seller due to tax considerations. But I don't believe the buyer would benefit much if at all from a stock purchase. Therefore, in my opinion it would be safer to purchase assets only, and from a tax standpoint the assets purchased can be either depreciated or expensed in order to lower taxable income. (On the other hand, when you purchase assets you may owe sales tax or use tax to the state.) Definitely discuss these options with your accountant.
     

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