What is Assumption of Debt?
The Short Answer
Assumption of Debt explained simply
Assumption of debt happens when a buyer agrees to take on the seller’s existing business loans or other financial obligations. Instead of the seller paying off the debt before the sale, the buyer steps in and becomes the new borrower. This can be a way to structure a deal, especially if the existing debt has favorable terms or if the buyer needs financing and qualifying for new loans is difficult.
Real-World Example
The Coffee Shop Debt
Imagine a coffee shop owner, Sarah, is selling her business. She has an outstanding loan of $50,000 for espresso machines. A buyer, Tom, wants to purchase the shop. Instead of Sarah paying off the $50,000 loan, Tom agrees to assume the debt. This means Tom will now be responsible for the remaining payments on that $50,000 loan, and the purchase price of the business would likely be adjusted to reflect this.
Why this matters
Assuming debt can make a business sale easier by reducing the amount of cash a buyer needs upfront. It can also be beneficial if the existing loan has better interest rates or terms than what a buyer could get on a new loan. For sellers, it can simplify the exit process by not requiring them to pay off all debt before closing.
When considering debt assumption, always review the loan terms carefully. Make sure the interest rates, payment schedule, and any covenants are acceptable to the buyer. Sometimes, the existing lender will need to approve the transfer of debt.
When considering debt assumption, always review the loan terms carefully. Make sure the interest rates, payment schedule, and any covenants are acceptable to the buyer. Sometimes, the existing lender will need to approve the transfer of debt.
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