We have significant shareholder loans and an active line of credit on our balance sheet that we used to fund early growth. How do we clean up these liabilities during our exit runway so they do not complicate our debt-free, cash-free closing terms?

Question

Tyler Smith · Accepted Answer

Most business acquisitions are structured on a debt-free, cash-free basis. This means you, the seller, are responsible for clearing all outstanding third-party debt before or at the moment of closing, while keeping any cash generated up to that point, subject to working capital adjustments. Shareholder loans and active lines of credit must be addressed long before you begin due diligence.

Start by placing this balance sheet cleanup on your long-term Issues List. During your quarterly planning sessions, work with your CFO or outside CPA to map out a clear plan to extinguish these liabilities. For shareholder loans, you can either repay them using accumulated company cash or convert the outstanding debt into equity. Converting these loans to equity simplifies your balance sheet and avoids triggering unnecessary tax liabilities, but it must be done with proper legal documentation.

For your active line of credit, focus on optimizing your cash flow and working capital cycle on the exit runway. Use your weekly Scorecard to track your cash conversion cycle and accounts receivable aging. By accelerating collections and managing inventory more tightly, you can systematically reduce your reliance on the line of credit.

If a balance remains on your line of credit as you approach a sale, plan for it to be paid off directly from the purchase proceeds at close. A clean, uncomplicated balance sheet signals to buyers that your financial operations are mature and transparent, reducing friction during due diligence and ensuring a smoother transaction.