Should you borrow in the years before selling your business?

Borrowing in the two or three years before a sale is usually fine, and it can push the price up. It depends on what the money does. Buyers price a small business on the profit it reliably makes before interest, and loans are normally paid out from the proceeds at settlement. A loan that raises profit can add to the price. A loan that covers losses just takes money out of your pocket at the end.

Most owners who plan to sell get cautious about money early. They put off the new machine, skip the fit-out, and pay down every dollar of debt because “buyers don’t like loans”. Sometimes that’s right. Often it leaves a business that’s tidier on paper but worth less, because the capacity a buyer would have paid for never got built.

So the useful question isn’t whether to borrow before a sale. It’s what the borrowing buys, and whether it has time to show up in the numbers.

Does debt lower what a buyer will pay?

Usually not directly. It helps to know how small business sales are normally priced and settled.

Most valuations start from adjusted profit: the profit a new owner could expect after a fair wage for the work you currently do, with one-off and personal items stripped out. business.gov.au’s guide to valuing a business sets out the common methods, and our own valuation guide works through them. Interest is normally left out of that profit figure, because the buyer will fund the business their own way.

Then comes the structure of the sale:

Sale type	What happens to your loans	What the buyer prices
Asset sale (most small businesses)	You pay them out from the proceeds at settlement; the buyer takes the assets free of security	Adjusted profit, plus stock and plant
Share sale (more common for larger companies)	The loans stay with the company, so the price is usually adjusted down for them	Adjusted profit, less the company’s net debt

Either way, the debt comes off your side of the ledger, not the buyer’s valuation. A $150k loan on a business that sells for $900k means roughly $750k reaches you before tax and costs. That’s the same answer as if the loan had never existed and you’d spent your own $150k instead.

So debt mainly changes how much of the price you keep. Whether the price itself goes up depends on what the borrowed money did.

What kind of borrowing can lift the price?

Borrowing earns its place before a sale when it does one of two things: lifts the profit a buyer can rely on, or removes a risk they’d otherwise discount for.

Borrowing for…	How a buyer sees it	Time it needs to show
Equipment that adds capacity or cuts labour	Higher, repeatable profit, plus a modern asset they don’t have to replace	12–24 months of trading
A fit-out or refurbishment	Tired premises fixed, a lease they’re happier to take on	6–18 months
Systems that reduce dependence on you	Lower owner risk, which can support a higher price	12+ months, so you can show it working
Stock or working capital for a bigger contract	Higher turnover, if the margin holds and the customer stays	Depends on the contract
Covering losses or a falling trend	A problem that hasn’t been fixed	Never: it doesn’t add value

The bottom row is the one to watch. If you’re borrowing to keep the lights on while trade slides, a buyer will see the slide in your profit and loss, see the repayments in the bank statements, and price both. That’s a fix-the-business problem first, and a sale is usually better left until it’s solved.

When is the right time to borrow before a sale?

Buyers and their accountants usually want to see at least two or three years of financials, and they give the most weight to the latest one. That sets the timing for you.

• Three years out. The best window for growth borrowing. A new machine, a second van or a fit-out can run for two full years before a buyer looks, so the extra profit is there in the accounts rather than in a forecast.
• Two years out. Still workable for most investments. You’ll get at least one clean full year showing the result. Start getting the records sale-ready now as well.
• Twelve months out. Borrow only for something short and explainable: seasonal stock, a contract you can document, a tax bill you’d rather not carry to settlement. Anything bigger will show up as a cost without the profit to match, and buyers don’t pay for forecasts.
• In the sale process. Avoid new facilities unless there’s no other way. Any new registration or guarantee has to be explained and discharged before settlement.

If a growth project would only start paying off after you’ve gone, it’s the next owner’s project. Leave it in your information pack as an opportunity and let the buyer fund it.

If you’re two or three years out and there’s an investment that would make the business worth more, now is the time to see what you could qualify for, well before a buyer’s accountant starts reading your statements.

A worked example: the joinery workshop

Illustrative example only. The figures are invented to show the arithmetic.

An owner runs a joinery workshop and plans to sell in about three years. Adjusted profit, after a fair manager’s wage, is $240,000. For the example, assume buyers in this market are looking for a 40% return, which under the return-on-investment method business.gov.au describes puts the business at about $600,000 ($240,000 ÷ 0.40).

Option A: hold off. The owner doesn’t borrow, pays nothing extra, and sells three years later on roughly the same profit for roughly $600,000.

Option B: borrow for a CNC machine now. The owner borrows $150,000. The machine cuts labour hours and lets the workshop take on cabinetry work it currently turns away. After running costs, maintenance and depreciation, adjusted profit rises by $50,000 a year from the second year.

	Option A	Option B
Adjusted profit in the sale year	$240,000	$290,000
Indicative price at a 40% return	$600,000	$725,000
Loan balance paid out at settlement (assumed)	—	$55,000
Proceeds before tax and selling costs	$600,000	$670,000

On top of the $70,000 difference at settlement, the owner has had roughly two years of extra profit while they ran it. The loan repayments came out of that extra profit, not out of the old business.

Now flip it. Suppose the same owner instead borrowed $80,000 nine months before listing to cover a run of losses. The buyer sees falling profit, a fresh loan and no asset to show for it. The price goes down, not up, and the $80,000 still has to be repaid out of whatever the buyer pays.

Same business, same debt total, opposite results. The difference is entirely in what the money did and when.

What will a buyer’s accountant look for in your debt?

Due diligence will find your borrowing whether or not you mention it, so it’s far better to present it cleanly. Our due diligence guide shows the process from the buyer’s side. On the debt specifically, expect them to check:

• Security registrations. The buyer’s lawyer will usually search the Personal Property Securities Register for interests over the business’s assets. The PPSR is where lenders and suppliers record their claims over personal property. Old registrations for loans you repaid years ago, or blanket registrations from a supplier’s credit application, still need to be released. Clear them early. Chasing a discharge in settlement week is stressful.
• Repayments in the bank statements. They’ll match each regular debit to a facility. Have a one-page list ready: lender, balance, security and what it funded.
• Interest and finance costs in the accounts. These are added back when profit is normalised, so make sure they’re clearly separated from operating costs.
• Owner loans and drawings. Money moving between you and the business needs a clean trail and an agreed treatment at settlement.
• Tax debts. An ATO payment plan isn’t a deal-breaker, but a buyer will want to know it’s cleared at settlement. business.gov.au’s steps to sell your business also suggest planning for the tax the sale itself creates, so you don’t trade one tax debt for another.

Remember that personal guarantees you’ve signed generally stay with you until the facility is repaid and released. Pay out and get releases in writing at settlement. Don’t assume it all goes with the business.

How does pre-sale borrowing interact with tax?

Two points to raise with your accountant before you sign anything significant.

First, the small business CGT concessions can make a large difference to what you keep. For some owners, one eligibility route is the maximum net asset value test. Because it counts net assets, how borrowing and the assets it buys sit across your structure can move the number. That’s worth modelling three years out, not in settlement week.

Second, an asset bought with borrowed money gets depreciated, then sold as part of the business. How the sale price is split between goodwill, plant and stock affects the tax on each, so agree the allocation with your accountant before the contract is drafted.

A pre-sale borrowing checklist

Before you borrow in the run-up to a sale, check that:

1. The purpose lifts adjusted profit or removes a buyer’s discount, and you can say how in one sentence. The seven tests in when to borrow still apply.
2. There’s time for it to show: ideally two full years of accounts before you list.
3. Repayments fit comfortably in your 13-week cash flow forecast, with a buffer left over. A sale process is slow, and a cash squeeze halfway through weakens your negotiating position.
4. The facility can be paid out cleanly at settlement, and you know any break costs in dollars.
5. Your accountant has looked at the tax side, including the CGT concessions.
6. You’ve cleared old PPSR registrations and listed every facility in one place.

Build it up, then sell it well

Selling a business is usually the biggest money event of an owner’s working life. The years before it are the last chance to put your own effort into making the business worth more. That might be the equipment you’ve been putting off, a refresh of a tired shop, or the systems that let the business run without you. Paying for it from savings is fine if you can. Borrowing for it is fine too, as long as the money lifts the profit a buyer will pay for and there’s time for that to show.

That’s where we come in. We look at trading businesses for unsecured and line-of-credit options typically from $5,000 to $500,000, and property-secured loans from $20,000 to $5,000,000, for business purposes. We’ll talk through how a facility would be paid out when you sell, not just how it starts.

Enquiring takes about 60 seconds and there’s no credit check when you first enquire. Your details don’t go out to a pile of lenders, so you won’t get a flood of calls from strangers. A real person reads what you’ve told us, thinks about your business and your timeline, and gives you a call. Please fill the form in accurately: turnover, time trading, what the money is for and roughly when you plan to sell. That way we can point you to the right option the first time.

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