Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com. Her book, “The Million-Dollar, One-Person Business,” was released in 2018. She writes “Your Business Credit,” a weekly column about small business and credit, for CreditCards.com.
What happens to my credit accounts after selling my business?
Any credit accounts associated with your business don’t go away automatically when you sell the business.
Make sure to close them correctly, at a pace that won’t hurt your credit, and try to pay off any card debt associated with the business, if possible. This will help you keep your credit intact and add value to the business you’re selling.
Dear Your Business Credit,
I am thinking about selling my business. What happens to my credit accounts after that? – Diane.
Contrary to what many people think, your credit accounts don’t go away automatically when you sell a business.
Generally speaking, to open a small business credit card, owners must give a personal guarantee. If that is the case, you will remain responsible for paying off any debt you’ve racked up once you sell your business, unless you have negotiated other arrangements with the buyer, which I’ll get to later.
Dealing with business credit card accounts
Even if you don’t have a balance on the cards, it does not mean the accounts will be closed automatically. You must call or send a letter to the issuer to do so. Keep records of these communications.
If you have multiple business credit cards, it is often best to close them over a period of time, rather than all at once.
Business card issuers’ policies vary as to when they report to the major credit bureaus that track individuals’ personal credit scores, so it is hard to predict exactly how closing the cards could impact your credit profile.
However, closing them all at once is likely to have a bigger impact than closing them gradually.
The oldest accounts you have are most important to your credit score, so often it is best to close the newer accounts first, unless, for instance, you have to pay a high fee to keep an old one open. When you cancel the cards, make sure to end any autopay arrangements you’ve made.
Handling debts upon selling a business
What if you can’t pay the debts?
When a business is sold, it is often via two types of deals. One is a stock sale. This is commonly used by big companies. In a stock sale, the owner sells everything the business owns, such as assets and liabilities, like debts. In a stock sale, the new owner would acquire the responsibility for paying the debt.
It’s much more common for a small-business owner to do an asset sale. In these transactions, the owner negotiates the transfer of certain assets and liabilities. You could conceivably negotiate a deal where the owner would assume responsibility for all or part of your debt.
If you want to go this route, it is a good idea to bring in a business broker to help you package the deal in a way that helps you to sell it for the highest price.
A good business broker can help you take stock of any debt, figure out how best to include it in a deal and arrange for an orderly transition of any existing accounts you are able to transfer.
For instance, if you can’t pay the full debt of the business anytime soon, they might advise you to pay off what you can to make the business more attractive to buyers. Stronger financials will enable you to seek more for the business.
Tip: For most owners who lack a financial services background, coming up with the right strategy to sell a business will be too complicated for the DIY approach, so I would not recommend that. The International Business Brokers Association, a reputable organization in its industry, offers a search tool on its site to help you find a business broker in your area.
Why paying off business debt pays off
You may dread the thought of paying off any business debt now that your mind has moved onto the next chapter of your life, whether that’s built around a job, another business or retirement, but it’s worth it to take a proactive approach.
Many small-business owners never manage to sell their business. BizBuySell, a large marketplace for small businesses, says sales of small businesses reached in 2017, with 9,919 closed transactions. Nonetheless, the site currently has 45,000 active listings, a number that is pretty consistent from quarter to quarter. The upshot is that a lot of businesses that get put on the market do not sell.
Of course, there’s a lot you can do to increase the odds in your favor, and making sure you take care of your credit accounts properly will help a great deal on that front.