What Happens to Business Debts When You Sell?

The question nobody asks early enough

When business owners imagine selling, they picture the number: what the business will sell for, what they'll walk away with, what their life looks like after. What they don't often picture is the negotiation around what they owe, and how those debts affect the final figure.

It's one of the most common surprises in a business sale — not that debt exists, but how it plays out at settlement. Buyers and their advisers look at the whole picture. Every liability matters. And the structure of the deal (whether you're selling assets or shares) determines who ends up responsible for what.

This guide explains the main categories of business debt, how they're handled in a typical Australian small business sale, and what you need to do before you get to the negotiating table.

Asset sale vs share sale: why it matters for debt

Most Australian small and medium business sales are structured as asset sales. This means the buyer purchases the assets of the business — the equipment, stock, intellectual property, goodwill, customer relationships — without taking on the legal entity (the company) itself.

In a share sale, the buyer purchases the company itself — the shares — and everything inside it: assets, contracts, and liabilities.

This distinction is critical when it comes to debt:

• In an asset sale, your debts generally stay with you. The buyer gets the business, you keep (and pay out) the obligations.
• In a share sale, your debts come with the company. The buyer inherits the entity — including its liabilities — which is why share sales attract more scrutiny, more due diligence, and typically more indemnities in the contract.

Most family business owners end up doing asset sales. If that's your situation, here's what happens to your various debts.

Business loans and equipment finance

If your business has an outstanding loan — a bank facility, a business line of credit, or equipment finance — that loan is almost always your responsibility, not the buyer's. In an asset sale, the buyer is not stepping into your loan agreement.

In practice, this typically plays out one of two ways:

Option 1: Pay it out at settlement. The most common approach. The outstanding loan balance is deducted from the sale proceeds at settlement, and the debt is cleared. Your bank or lender is notified, the loan is repaid, and any security over the business assets is released. From that point, the assets are unencumbered and can be transferred to the buyer cleanly.

Option 2: Transfer to the buyer. Less common, but it does happen — particularly when the loan is attached to a specific asset like a truck or a piece of equipment, and the buyer wants to take over that asset along with the finance. This requires the lender's agreement. The lender will assess the buyer as a new borrower and either approve the transfer or require the loan to be refinanced in the buyer's name.

If you're paying out a loan early, check whether your loan agreement has a break fee or early repayment penalty. These aren't always large, but they should be factored into your net proceeds calculation before you finalise a price.

What about your personal guarantee?

Many small business loans come with a personal guarantee — the owner signs on as guarantor, meaning the bank can come after you personally if the business can't service the debt. This is standard practice for SME lending in Australia.

The critical thing to understand: the personal guarantee does not disappear automatically when you sell.

If the loan is paid out at settlement, the guarantee is released as part of the payoff process — the debt is gone, so the guarantee is too. But if there's any scenario where the loan is being transferred to the buyer rather than repaid, you need written confirmation from the lender that your personal guarantee has been formally released. Until you have that in writing, you remain on the hook.

This is an area where it pays to be thorough. Don't assume. Ask your lender directly: "When this loan is transferred or repaid, can you confirm in writing that my personal guarantee is discharged?"

ATO debt — the one that surprises people most

Tax debt is handled differently depending on whether you owe it personally or through your company — but in either case, it does not transfer to the buyer. The ATO's claim is against you or your entity, not against whoever buys the business.

Here's how it tends to play out in practice:

If you have an outstanding ATO debt, it will usually surface during due diligence. Buyers and their accountants routinely request ATO tax portal access or ask for statutory declarations about outstanding liabilities. An undisclosed ATO debt is the kind of thing that kills a deal — or leads to a significant price reduction and a very uncomfortable negotiation.

The better approach is to be upfront. If you have an ATO payment plan or outstanding GST, PAYG, or income tax obligations, bring your accountant into the conversation early. Many sellers clear ATO debt from the sale proceeds at settlement. The mechanics are straightforward: the conveyancer or settlement agent pays the ATO directly as part of the settlement distribution, and you receive the balance.

There is one extra wrinkle worth knowing about: Director Penalty Notices (DPNs). If your company has unpaid PAYG withholding or superannuation guarantee obligations, the ATO can issue a DPN that makes directors personally liable for those amounts. If you're facing a DPN, selling the business doesn't make that go away — the liability attaches to you personally. This needs legal and accounting advice before settlement.

Trade creditors and supplier accounts

Trade creditors are the businesses you owe money to — suppliers, wholesalers, subcontractors who've invoiced you but haven't been paid yet. In an asset sale, these are your obligations. The buyer is not purchasing your accounts payable.

This is where working capital adjustments come in.

Most business sale contracts include a mechanism to account for the "normal" level of current assets (debtors, stock, prepaid expenses) and current liabilities (creditors, accrued expenses) at the point of settlement. The parties agree on a target working capital level, and if the actual position at settlement is different from the target — more creditors than expected, or less stock — the purchase price is adjusted accordingly.

It works like this: imagine you agreed to sell for $1.2 million on the basis the business would have $100,000 in net working capital at settlement. When the settlement date arrives, the books show $60,000 in net working capital — because you have more creditors outstanding than expected. The purchase price adjusts down to $1.16 million to account for the shortfall. You receive less; the buyer effectively compensates themselves for the additional liabilities they're managing.

Working capital adjustments are a common area of dispute in business sales. Understanding your creditor position before you sign a contract is important — not so you can hide it, but so you can negotiate from an accurate base.

Employee entitlements: the often-overlooked liability

If your business has staff, their accrued entitlements — annual leave, long service leave, superannuation — are liabilities that need to be accounted for in a sale.

In an asset sale where the buyer takes on your employees (under a new employment arrangement), the question of who carries existing entitlements becomes a negotiating point. Often, the seller is expected to either:

• Pay out accrued leave entitlements before settlement (so the buyer starts fresh), or
• Accept a reduction in the purchase price equal to the value of those entitlements (so the buyer can fund them when they eventually fall due).

Long service leave is the one that surprises people most. If you have staff who've been with you for ten or fifteen years, the accrued long service leave liability can be substantial. Get your payroll reports run before you start negotiations — know what the number is.

Superannuation is also worth checking. If your business has any unpaid super guarantee contributions (amounts owed to the ATO's super fund clearing house or to individual funds), that becomes a liability issue during due diligence. Buyers don't want to inherit a super guarantee problem, and the ATO takes SGC non-payment seriously.

Lease obligations

If your business operates from leased premises, the lease is worth examining carefully. In an asset sale, the buyer typically wants to either take over your existing lease or negotiate a new one directly with the landlord.

The key questions are:

• Does the lease have a personal guarantee from you? If so, does it survive an assignment?
• Is there a make-good clause requiring you to restore the premises at the end of the lease? Who carries that cost?
• How much time is left on the lease? Buyers generally want certainty — a lease with two years remaining and no option is a risk they'll price into their offer.

Lease assignment (transferring the lease to the buyer) usually requires the landlord's consent. Most commercial leases allow this but require a formal assignment deed. The landlord may also require the buyer to provide personal guarantees — and they may want you to remain as guarantor on the old lease until they're satisfied with the buyer's financial position.

This is an area to resolve early in the process, not at the last minute. An uncooperative landlord can delay or derail a settlement.

Other secured creditors: equipment, finance companies, and PPSR

Australia has the Personal Property Securities Register (PPSR) — a national database where lenders can register security interests over assets. If someone has lent you money secured against your equipment, stock, or other assets, they'll likely have a PPSR registration.

Before settlement, all PPSR registrations over assets being transferred to the buyer need to be discharged. The buyer's lawyers will run a PPSR search as part of due diligence. If there are registrations outstanding, the buyer will want confirmation that those interests are being released before they transfer the purchase price.

This is procedural, but it needs to be done correctly. A PPSR registration that isn't discharged can give a lender a continuing claim over assets that are now supposed to belong to the buyer. Your solicitor or settlement agent handles this as part of the conveyancing process.

What about debts you've forgotten about?

This sounds like a strange question, but it comes up more often than you'd think. Small businesses accumulate obligations over time — an unpaid invoice that got lost in a dispute, a supplier credit account that was never formally closed, a government fee that wasn't followed up. None of these are huge on their own, but they can surface during due diligence and complicate the sale.

Before you start a sale process, it's worth doing a systematic sweep:

• Review your accounts payable properly — not just what's in the system, but old statements from suppliers you've been dealing with for years
• Check ASIC for any outstanding fees or registered charges
• Run a PPSR search on your own business (you can do this through the PPSR portal)
• Ask your accountant for a clean summary of ATO obligations including superannuation
• Review your equipment finance schedules and check payout figures

Knowing your own position before the buyer's due diligence team starts looking is always better than being caught off guard.

The net proceeds question

Here's the thing most sellers discover once they actually start the process: the headline sale price and the net amount you walk away with are often meaningfully different.

Between loan payouts, ATO obligations, creditor adjustments, employee entitlements, legal and advisory fees, and any CGT that falls due, the gap between "sold for $1.4 million" and "received $900,000" can be significant. It doesn't mean the sale wasn't worth it — it usually still is — but the math needs to be done properly before you agree to a price.

A good accountant can model this out for you before you even engage a broker. What are your known liabilities? What are the likely tax outcomes? What does net-in-hand actually look like under a few different scenarios? Starting with that picture gives you a realistic floor — the minimum you need from a sale for it to make financial sense.

What buyers care about

From the buyer's perspective, debt creates risk. Not necessarily deal-breaking risk — businesses carry debt, and buyers understand that — but unquantified or undisclosed debt is a different matter entirely.

Buyers and their advisers are looking for:

• A complete picture of all liabilities, not just the ones on the balance sheet
• Confirmation that debts being left with the seller will be fully discharged at settlement
• Clean title to the assets they're purchasing (no security interests, no encumbrances)
• No hidden contingent liabilities (disputes, warranty claims, regulatory issues) that could land on them post-settlement

If you can hand them a business with clean, documented financials, a clear liability position, and no surprises, you're making their decision easier. That's worth something — both in their confidence to proceed and in their willingness to pay a fair price.

When it gets complicated: share sales and legacy liabilities

If your sale is structured as a share sale, the dynamics are more complex. The buyer is acquiring the legal entity — the company — with everything in it. That means historical liabilities matter more. A tax dispute from three years ago. A warranty claim from a job gone wrong. An employment claim that never got formally resolved.

In share sales, sellers are expected to give detailed representations and warranties — formal statements that the business has no undisclosed liabilities. The contract will usually include indemnities: if a historical liability surfaces after settlement, you're obliged to cover it. Buyers may also hold a portion of the purchase price in escrow for a defined period as a buffer against post-settlement claims.

This is why share sales require more legal work and typically attract higher advisory costs. The liability profile of the company is being scrutinised much more carefully.

What to do before you list

If you're thinking about selling in the next one to three years, here's the practical list:

1. Get your accounts in order. Three years of clean, professionally prepared financials is the baseline. If your books are a mess, clean them up now — not during a sale.
2. Know your debt position. List every formal obligation: loans, lines of credit, equipment finance, ATO obligations. Know the payout figures.
3. Check your PPSR. Run a search on your ABN or ACN and know what registrations are outstanding.
4. Quantify employee entitlements. Get a payroll report showing accrued leave and long service leave for all staff.
5. Review your lease. Know the remaining term, the options, the personal guarantee position, and the make-good obligations.
6. Clear any ATO arrears. If you have a payment plan, prioritise clearing it before you go to market. It simplifies due diligence and removes a potential deal-breaker.

None of this is difficult. It's the kind of housekeeping that good businesses should be doing anyway. The difference is that in a sale, it gets scrutinised — so the time to do it is before a buyer is looking over your shoulder.

The bottom line

In a typical Australian small business asset sale, your debts are your responsibility. Loans are paid out at settlement, creditors are factored into working capital adjustments, ATO obligations are cleared, and the assets transfer to the buyer unencumbered. You walk away with whatever remains after all of that — which is why modelling the net proceeds properly before you agree to a price is so important.

The sellers who handle this well are the ones who know their numbers before the process starts — not the ones who discover their liability position mid-negotiation when the buyer's accountant runs the numbers and the deal starts to wobble.

Start with the truth of what you owe. The cleaner your position, the easier the sale.