The Importance of Your Personal Credit Score When Selling a Business
We often think of the importance of a personal credit score when buying a business. It makes sense, right? A part of buying a business, especially if it is your first business, is qualifying for financing unless you have a huge amount of cash.
What about when you are selling a business? Well, your personal credit can be hugely impacted when you do, and it is important to know how, and to know why taking your personal credit score into account when selling a business makes sense.
The Structure of the Sale
There are a variety of ways to structure a sale, but two of the most common and important categories are a stock sale or an asset sale.
A stock sale is most often done by a larger company, and in that case the owner sells everything the business owns, including assets and liabilities, like debt. In this case, the buyer assumes responsibility for the debt. It is important to make sure this is structured correctly, so that the new owner takes over the current accounts or opens new ones and pays off the ones that you owe.
In an asset sale though, which is more common with smaller businesses, the seller negotiates the transfer of certain assets and liabilities. It is possible to negotiate the sale so the buyer is responsible for some or all of the business debt.
This is one of the many reasons a business broker is important. They can help structure the sale to minimize the seller’s liability. Paying off those accounts is a good thing, right? Well, maybe.
Closing Business Credit Accounts
This is actually not always a good idea. It depends on a couple of things though. If you guaranteed the loan personally when you started the account, which is the most likely scenario until you build business credit, closing the account can actually decrease your credit score.
The reason is that one of the criteria for your credit score is credit utilization. This is the percentage of the available credit you have that you are actually using. If you close an account, you lower the amount of credit you have available, and therefore increase the percentage of available credit you are using.
In other words, say you have credit cards and lines of credit including your business accounts with total credit limits of $20,000. Let’s say, for ease of math, that you are using $7,000 of those credit limits.
If on the day you sell your business, you close all the business accounts, and that lowers your available credit limit to $10,000 instead of $20,000 you have instantly gone from a 35% credit utilization to a 70% credit utilization. Your credit score would instantly drop if all of those creditors reported the change at the same time.
It is best to pay off these accounts, but either close them all slowly, or talk to your creditor about transferring them to your new business venture. If you are retiring, talk to your financial planner and close these accounts slowly, even if you freeze their use so no new debt can be accrued. It might still impact your credit score unless you pay off other debts at the same time, but it won’t be as harsh and drastic.
Paying off Debt Before you Sell
One of the things we stress here at Rogerson Business services is getting ready to sell your business. Part of this means paying off debt. If you pay off some off some of your business debt before you put your business up for sale, it can increase your business valuation, allowing you to get a better price for your business in the long run.
While it is often hard to convince yourself to pay of debt when you are ready to move to the next chapter of your life, it can be a vital step. Again, talk to a business broker when you are getting ready to sell, and they can explain the advantages and disadvantages of various approaches.
What is the next chapter of your life? Whether it is owning another new business or retirement, your credit score will likely impact your lifestyle and what you will be able to do financially in that chapter. Making sure that selling your business is a good thing for your credit score, and not a negative one, is truly important.
How do you make sure? Contact a business broker for one thing. Be sure you get a good business valuation and take any steps regarding debt that you need to do to make that price more appealing to a buyer. Pay attention to the structure of the sale, and get solid, professional financial advice before closing business accounts.
Your personal credit score matters when buying or selling a business. When you’re ready to sell a business contact us here at Rogerson Business Services. We’d be happy to discuss the process with you and help you prepare.