Selling a business that has debts or an ATO debt

In a typical small business sale, the buyer purchases the business assets, not the company that owes the money. Your debts stay with you, and the usual approach is to pay them out of the sale proceeds at completion.

Your solicitor obtains payout figures from each lender and arranges for the funds to go directly to them on the day.

The buyer's solicitor will want proof that the assets they're buying are free of any security. That's why the Personal Property Securities Register matters: if a lender has registered an interest over your equipment, vehicles or other assets, it needs to be released at completion.

Write down every liability: bank loans, overdrafts, equipment and vehicle finance, credit cards, supplier accounts, unpaid super, and anything owed to the ATO, including GST, PAYG withholding and income tax. Include personal guarantees you've signed for the business, such as on your lease or finance.

Then compare the total with a realistic sale price. If proceeds comfortably cover the debts, it's mostly an administrative exercise.

If they don't, you need advice before you talk to buyers, not after.

If your business runs through a company, directors can become personally liable for the company's unpaid PAYG withholding, GST and super guarantee charge. The ATO enforces this through a director penalty notice.

Timing matters enormously. If those amounts are reported to the ATO within three months of the due date, a director penalty can generally be remitted by acting within 21 days of a notice.

If they're reported late or not at all, the penalty becomes 'locked down' and paying the debt in full is essentially the only way out. The simplest protection is to keep lodging your BAS and super statements on time, even when you can't pay.

The ATO generally prefers engagement to enforcement. Businesses with tax debts can often arrange a payment plan, and smaller debts can usually be set up online.

Being on an agreed plan and up to date with lodgments puts you in a much stronger position when you sell.

Tell your accountant and solicitor about any ATO debt early. The sale contract and settlement can be arranged so the tax debt is cleared from the proceeds, giving the ATO certainty and giving you a clean break.

Debts show up in due diligence: on the PPSR, in your balance sheet, in your bank statements and in the ATO's records. A buyer who discovers a debt late will start wondering what else they haven't been told, and that loss of trust ends more deals than the debt itself.

Disclosed early, with a clear plan for how it's paid at completion, debt is usually a non-issue for a sensible buyer.

If what you owe is more than the business could sell for, the conversation changes. You may need to negotiate with lenders, extend the timeline to pay debt down first, or look at formal options.

Small businesses with company structures may be able to use the small business restructuring process through a registered practitioner.

Speak with your accountant and, if needed, a registered insolvency practitioner as early as possible. Acting early keeps more options open and helps protect you personally.

Sometimes it's worth paying down expensive debt before a sale, especially equipment finance on assets the buyer will take over. Other times, a buyer may agree to take over a finance contract as part of the price.

Your accountant can model which approach leaves you with more.

Either way, knowing your numbers lets you work out your real walk-away number and negotiate with confidence instead of anxiety.