#19 | Assuming Debt in an Acquisition? Don’t Assume.

I will always remember walking into my 11th grade math class and the white board just said “Ass U Me.”

The lesson that day was not to assume because assuming can make an ass out of you and me.  

Honestly I have no idea what that had to do with math, I think maybe it was just life advice not to assume things. 

I have worked on a couple of deals with clients recently who are looking to acquire a business and they “assumed” that they would be able to “assume” the debt of the business they are buying.   

The business has an existing SBA loan and the acquirer was hoping / assuming they could just take over making payments on that loan.  

You should not assume that you can assume the debt.  It is not your decision to make, it is the lender’s decision.  The current owner of the business likely has a personal guarantee on that loan, and if you buy the business the lender will not just release the former owner of their personal guarantee.  You will need to ask the lender whether you can assume the debt and they will basically need to re-underwrite the deal with you (the new owner) as the guarantor.  

It is possible that the lender will not allow you to assume the debt.  If this is the case, you need to pay the loan in full at the time of acquisition.  

Don’t Surprise the Lender

It is important not to assume that the bank will work with you and you should not wait until the last minute to ask the bank to allow the new buyer to assume the debt.  

I can remember a couple of times during my SBA lending days where I found out my client had sold the business and the new owner was just continuing to make payments.  The client had no idea they had done anything wrong.  But that was actually a technical default and we had the right to call the loan to be repaid in full immediately and liquidate their equipment that we had as collateral.  

We ultimately were able to work it out with the new owner to allow them to assume the loan, but it wasn’t a good feeling to be surprised.  

So the lesson here is that if your acquisition relies on you assuming the existing debt of the seller, you need to start talking to the lender ASAP to avoid getting to the closing table and realizing you can’t close the deal because the debt can’t be transferred.