When a business is sold with unpaid debts, it is the suppliers who can sometimes be left out in the cold trying to retrieve their money. Suppliers who have registered their security interests in their equipment and goods (‘personal property’) on the PPSR are unlikely to find themselves in this situation. These suppliers are often paid in full before the business changes hands. Equifax’s PPSR expert, Andrew McLellan, explains why.

What happens to debt when your customer sells their business

“When purchasing a business, a buyer wants to know that the company’s assets that they are purchasing are free from other claims or encumbrances. The last thing the buyer needs when taking the reins of their new business is to have suppliers knocking on the door demanding payment for the outstanding bills of the previous owner. Particularly if it’s for goods they’ve already paid the previous owner for.

“So before they close the deal on the new business, most buyers will demand that the vendor remove all security interests registered on the PPSR over the entity. Only their removal can provide confirmation that they will be getting clear title to the assets that they are acquiring.

It’s at this point in the selling process that the vendor will get in touch with their suppliers to request they discharge their PPS registrations, says McLellan. 

If you have outstanding invoices when this request comes in, this is your opportunity to get paid. Tell your customer that you will complete the discharge as soon as the amount owed to you is paid in full.

“While it’s not foolproof, I’ve found that most customers pay up because they know the sale of their business depends on it. Buyers who understand the PPSR won’t be interested in a purchase that leaves them responsible for paying the debts of the previous owner,” he says.

Even if a business doesn’t have the financial ability to pay these suppliers immediately, they will be in a position to pay at settlement. So as a supplier, you have the option to discharge your registration, provided you have written assurance from the vendor’s lawyer that the money will come out of the settlement proceeds.

Suppliers without the safety net of a PPS registration won’t receive any such assurance for payment. 

Food suppliers, in particular, are likely to benefit from PPSR protection when a customer sells their business. With the short shelf life of many food supplies, there is little value in suppliers retrieving their goods in exchange for non-payment. So as a food supplier, taking out PPS registration improves your ability to be paid when a customer sells their business. 

As the risk of customers selling up or going bust continues to grow post-COVID-19, find out what you can do to protect your business. Get PPSR advice you can trust from a PPSR expert at EDX.

Useful reading: Insolvencies: How to Get Paid First

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