Red flag - bus owes owners $500k (early cashout)

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by a searcher from University of Auckland
in Sydney NSW, Australia

1yr ago

Red flag - bus owes owners $500k (early cashout)

Hi team,
I’m currently in the process of buying a business, but I’ve noticed something concerning in the financials.

Last year the business has:

- Increased its non-current liability by $500K to an entity controlled by the owners (owner's Investment Ltd) – looks like the owners wanted to cash out early before selling.

- This resulted in negative equity of -$443K.

I understand that an asset sale could help me eliminate this liability, as long as:
My Debt-to-EBITDA ratio, cash flow projections, and interest coverage ratio still make sense (after removing the owner’s debt).
I can use this as leverage to negotiate the purchase price down.
Am I overlooking any other risks?
Would love to hear from those who’ve dealt with similar situations!
Thanks in advance.

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reply by a searcher 1yr ago
from Cornell University in Boston, MA, USA

The liability/shareholder loan is just equity. The key is that the Seller not strip cash and net operating working capital from the business right before closing and leave you cash short in the firstredacteddays. Thanks.

reply by an intermediary 1yr ago
from The University of Chicago in Chicago, IL, USA

I agree with ^redacted‌ and ^redacted‌.
Some have said that owner took out cash. If so, this would not be a liability on the BS. it will be a receivable from the shareholder i.e. an Asset on the BS.
One possibility: Shareholder put in Cash in the business and recorded it as a liability of the business to pay it back. Then, the cash was used to a) pay down the debt. But in this case, it will not impact equity account, or b) to buy-out shares of a partner or an entity. Such share purchase would reduce equity and may result in negative equity., or c) the business declared dividend but did not pay. In this case equity would reduce and may become negative and there would a dividend payable liability recorded as a Note payable.
Neither a) nor b) nor c) is a red flag. However, if it is b), find out whose shares were purchased back, and why.