Does Drawing Down Loans Affect My Business Value?

Exploring the relationship between debt, enterprise value, and preparing your business for sale. A joint article by Strategix Asia and FindTheLoan.com

*One of the most frequent questions we hear from business owners considering a sale is: “Do I need to pay off my company’s loans before selling?”

The short answer? Not necessarily. The longer answer involves understanding the concept of enterprise value (EV) and how buyers assess your business’s worth beyond just its debt obligations.

In this article, we’ll break down how drawing down loans impacts your business value, how buyers typically view debt in a transaction, and what you should consider when preparing your business for sale.

1. What is Enterprise Value, and Why Does It Matter?

Before we answer whether you should pay off existing loans before selling your business, let’s clarify how enterprise value (EV) works.

Enterprise Value = Equity Value + Net Debt.

        • Equity Value is what the business owner ultimately walks away with.
        • Net Debt is the difference between your company’s debts (loans, leases) and cash on hand.

When a buyer looks at your business, they consider everything your business owns and owes. This means any loans your business has will be factored into the sales price when deciding how much they are willing to pay for it.

Quick Tip

If your business has taken loans to grow — like buying new equipment or opening more locations — it can make your business more valuable. But this only works if the money you earn from that growth is more than the cost of paying back the loans.

2. Does Drawing Down Loans Increase or Decrease Business Value?

It depends on how the loans are used. Here’s a breakdown:

Scenario

Impact on Business Value

Loans used for growth

Increases EV if the borrowed funds are generating higher profits.

Loans used to cover losses

Reduces EV if the loans aren’t translating into business growth.

Short-term working capital loans

Neutral impact if used to manage cash flow without affecting profitability.

3. Should You Pay Off Loans Before Selling Your Business?

The decision to pay off existing loans before a sale depends on several factors:

When Paying Off Loans Makes Sense

  • Your loan terms are unfavorable, with high interest rates that eat into profits.
  • The business’s cash flow is strong enough to clear debts without compromising operations.
  • Buyers in your industry prefer debt-free acquisitions (common in small SME deals)

When Keeping Loans Makes Sense

  • The loans were used to finance growth projects (e.g., new equipment, expansion) that will continue to generate revenue.
  • The debt terms are favorable, and the buyer is comfortable taking over the liabilities.
  • Paying off the loans would deplete your cash reserves or impact working capital.

Pro Tip

 In most cases, buyers adjust their offer price to account for your company’s net debt. You don’t need to clear all debt before exploring a sale. What matters is the overall financial health and growth potential of the business.

4. How Buyers Evaluate Debt in an Acquisition

Buyers usually check the Buyers usually check the enterprise value of a business to get a full picture of its finances before deciding to buy it. 

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Good Scenario

 If loans were used to grow the business — like adding new products or opening in new locations — buyers will see this as a good sign and might offer more money.

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Bad Scenario

If loans were used to cover losses or keep the business running without profits, buyers may see this as a problem and lower their offer.

Buyers may either:

1. Take over the debt and reduce the equity payout to the seller.

2. Require the seller to clear the debt before finalizing the deal.

5. What Should You Do Before Exploring a Sale?

Here’s a checklist to manage your business’s debt before engaging with potential buyers in a M&A Sale Process:

Step

Action

Review Your Debt Terms

Understand your loan covenants, interest rates, and repayment schedule.

Assess Debt Purpose

Ensure that borrowed funds are tied to profitable growth initiatives.

Prepare Financial Statements

Provide clear, normalized financials showing how the debt has impacted your business’s growth.

Talk to an M&A Advisor

An expert can help you position your debt in a way that won’t scare off buyers.

6. The Bigger Picture: How Debt Affects Enterprise Value

Understanding how debt impacts enterprise value is crucial for any SME owner considering a sale. Debt doesn’t automatically reduce your business value — it’s how you use it that matters.

Want to dive deeper into enterprise value and how it impacts your business sale? You can read more in this article: “What is Enterprise Value and How Do Buyers Calculate It?”, where we explain how enterprise value is calculated, how it differs from equity value, and how understanding it can help you get the best deal when selling your business.

Key Takeaways

✅ You don’t need to pay off existing loans before exploring a sale. Buyers will adjust their offer price based on net debt.
✅Loans used for growth can actually increase business value. It’s about showing that the borrowed funds are driving profitability.
✅ Enterprise value matters more than equity value in M&A transactions. Focus on improving your EV to maximize your exit.

Ready to explore your options?

💡 FindTheLoan.com can help you secure the right financing to grow your business.
💼 Strategix Asia can guide you through the sale process to maximize your enterprise value.

Let’s connect to help your business achieve its full potential — whether you’re looking to scale, sell, or both!