Most Australian business owners carry some form of debt when they go to sell — equipment finance, a bank overdraft, a running account with the ATO, or trade creditors stretched longer than they should be. The question most owners ask is whether that debt stops the sale, reduces the price, or simply gets dealt with at settlement. In most cases, it’s the third option; but exactly how it’s handled depends on your sale structure and the type of debt involved. Here’s how it actually works.
What Types of Business Debt Are Involved?
Before getting into how debt is treated, it helps to separate it into three categories — because buyers and their lawyers treat each one differently.
Secured debt is borrowed money tied to a specific asset: a chattel mortgage on a vehicle, equipment finance on machinery, or a business property loan with a bank. The lender has a security interest registered on the PPSR (Personal Property Securities Register). Secured debt is the most straightforward in a sale context because it’s attached to something specific that can be paid out at settlement.
Unsecured debt includes trade creditors (money owed to suppliers), a running account balance with the ATO, instalment arrangements for unpaid PAYG withholding or GST, and a business overdraft not tied to a specific asset. These debts belong to the entity — the company or trust — not to any particular asset.
Personal guarantees are a separate category entirely. They sit over you personally, not the business. Most lenders require personal guarantees when a company borrows money, and they don’t automatically go away when the business is sold (more on that below).
Asset Sale vs Share Sale: This Changes Everything
Whether debt follows the business to the buyer depends almost entirely on whether you’re doing an asset sale or a share sale.
In an asset sale, the buyer acquires the assets — equipment, goodwill, customers, contracts, intellectual property — but does not assume responsibility for existing debts. Your company keeps those. That means before or at settlement, secured debts attached to assets being sold need to be discharged. Trade creditors, ATO debt, and the overdraft remain with the entity you owned, which you wind up after completion.
In a share sale, the buyer acquires the shares in your company — which means they acquire the whole entity, debts and all. A buyer doing a share sale conducts forensic due diligence on what liabilities sit inside the company, because those liabilities become theirs at completion. Any ATO debt, disputed creditor, or contingent liability inside the company gets priced into the deal or becomes a deal condition.
The rule of thumb: most SME sales in Australia are asset sales. It’s cleaner for both sides and avoids the corporate history problem. But larger deals, or deals where transferring contracts is complicated, sometimes require a share sale structure.
Secured Debt: Equipment Finance, Chattel Mortgages, and Business Loans
If your business has a chattel mortgage on a fleet vehicle, equipment finance on a machine, or a term loan against plant and equipment, the standard process at settlement is to pay out those loans from sale proceeds. The financier receives the payout, the PPSR registration is discharged, and the assets transfer unencumbered to the buyer. Your solicitor coordinates this with the buyer’s solicitor at settlement — funds flow simultaneously.
The practical issue arises when you owe more on the equipment than it’s worth. A truck purchased for $180,000 three years ago might have $110,000 remaining on the finance but only command $85,000 in the sale. The shortfall has to come from somewhere — typically from the broader sale proceeds or from cash you put in before completion. Equipment that has depreciated faster than expected, or was financed on aggressive terms, can create this situation. It’s worth knowing your payout figures well before you go to market.
Unsecured Debt: Trade Creditors, ATO Debt, and the Overdraft
For an asset sale, unsecured debts stay with the entity. The company owes its suppliers; that’s the company’s obligation. After the sale, you wind up the company and pay those creditors from cash that remained in the business at settlement plus any distributions made before completion.
The ATO is worth its own paragraph. A running account balance — whether it’s unpaid GST, overdue PAYG withholding, or a payment arrangement — doesn’t transfer to the buyer in an asset sale. It stays with your company. After the sale, you settle it using whatever funds are left in the entity. If the ATO has issued a Director Penalty Notice (DPN), that’s a different matter: a DPN creates personal liability that doesn’t transfer regardless of the sale structure.
I’ve seen an owner who disclosed a $140,000 ATO payment arrangement upfront at the start of the sale process (which is more than most sellers think to do). The buyer didn’t blink. What buyers react badly to is surprises. A disclosed debt is a pricing conversation. An undisclosed debt discovered in due diligence is a deal-killer, or at minimum a price chip.
Personal Guarantees: The Issue Nobody Thinks About Until Too Late
Here’s the part of debt management in a business sale that catches sellers off guard.
If you gave a personal guarantee when your company borrowed money — for a bank loan, an equipment facility, or a commercial lease — that guarantee sits over you personally. It doesn’t disappear when the business is sold.
In an asset sale, the standard resolution is to pay out the underlying debt at settlement (which extinguishes the obligation and the guarantee). Sometimes, where a buyer wants to take on an existing finance facility — for example, they want to keep a favourable equipment loan — the lender may be willing to release you and substitute the buyer as guarantor. But lenders aren’t obliged to agree, and in practice the cleanest outcome is simply to clear the debt.
In a share sale, the dynamic is trickier. The buyer now owns the company that borrowed the money. But you may still be sitting on a personal guarantee for that company’s obligations to the lender. The only way to extinguish that personal exposure is a formal written release from the lender — which requires either the debt being paid out or the lender agreeing to substitute a new guarantor. This needs to be negotiated explicitly at settlement, not assumed.
The due diligence process will surface every PPSR registration and every guarantee you’ve signed. Better that you’ve mapped them before the buyer’s lawyer finds them.
Does Business Debt Reduce Your Sale Price?
Yes and no — and the distinction is worth understanding.
In an asset sale, the headline price typically reflects the value of the assets being sold. Secured debt on those assets is discharged from proceeds at settlement; the buyer doesn’t reduce their offer to account for it because it’s your problem to clear. But your net receipt — what you actually take home — is the headline price minus every debt you discharge at settlement. Buyers call this the distinction between enterprise value (the value of the business) and equity value (what the owner receives after debts). A business worth $2.5 million with $400,000 in net debt delivers $2.1 million to the owner.
Where debt genuinely compresses the price is when it creates operational drag — high-interest equipment finance that depresses normalised cash flow, or trade creditors stretched to 90 days that suggest working capital is being used to fund operations. A buyer applying an EBITDA multiple to your business will see that drag in the numbers, and they’ll apply it in their offer.
A business with clean, manageable debt levels — where debt has been used sensibly to fund income-producing assets — is not inherently worth less than one with no debt. What matters is the normalised profit after removing debt-servicing costs that a buyer won’t carry, and what the buyer will actually have to fund.
What to Do Before You Go to Market
If you’re carrying debt and planning a sale in the next 12 to 18 months, three things matter.
First, get a full inventory of every obligation: secured and unsecured business debt, personal guarantees, instalment arrangements, and any informal loans. You should know the payout figure for each before a buyer asks. The ones who disclose everything early control the conversation; the ones who don’t get repriced at the last minute.
Second, run a PPSR search on your ABN and your company’s ACN. Any financier with a registered security interest over your assets will appear. Your lawyer will do this anyway during the sale process, but doing it early means no surprises for you.
Third, talk to a tax adviser about how your sale structure affects the treatment of proceeds. How funds are allocated to different asset classes at settlement, and whether you qualify for the small business CGT concessions, can have a significant impact on what you keep.
If you want to understand how your current debt position affects your sale price and process, speak to Miro Capital or use the business valuation calculator to get a starting point.
FAQ
What happens to business loans when you sell a business in Australia?
In an asset sale, secured loans on assets being sold are paid out from proceeds at settlement and PPSR registrations are discharged. Unsecured debts stay with the entity you own and wind up. In a share sale, all company debts transfer with the shares and are priced into the deal.
Does a buyer have to take on my business debts?
In an asset sale, no. Buyers acquire specific assets and the company’s debts stay with the seller. In a share sale, yes — the buyer acquires the whole entity including its liabilities. Most SME sales in Australia are asset sales, which means debt generally remains the seller’s responsibility.
Can I sell my business if I have ATO debt?
Yes. In an asset sale, ATO debt stays with your company after settlement; you pay it as you wind up the entity. In a share sale, it transfers to the buyer and affects what they pay. A Director Penalty Notice is a personal liability and doesn’t transfer with the company.
Do I need to pay off all debts before selling my business?
No. Secured debts on assets being transferred are discharged at settlement from proceeds. Unsecured debts in an asset sale are handled post-settlement as you wind up. What you can’t do is misrepresent your debt position — undisclosed liabilities are a standard warranty and indemnity trigger.
What happens to personal guarantees when I sell my business?
They don’t automatically expire. To be released, you need to either pay out the underlying obligation at settlement or obtain a written release from the lender. In a share sale especially, negotiate this explicitly — don’t assume the guarantee dissolves because the company has changed hands.