In most acquisitions the seller's loans are paid off at closing out of the purchase price. Each lender sends a payoff letter stating the exact amount due and agreeing to release its lien once paid, and the closing funds are wired to it directly. The new lender will not fund until every existing lien on the business is cleared or, less often, subordinated to it. Equipment loans, merchant cash advances, tax liens and old UCC filings all need the same treatment. A few debts can be assumed with the creditor's consent, but most change-of-control clauses make that the exception.
- Usual treatment
- Paid off at closing from the purchase price, directly to each creditor
- Document the payoff rests on
- A payoff letter with a good-through date, daily interest and a lien release undertaking
- What the new lender checks
- A UCC, tax lien and judgment search against the seller and the company, repeated just before closing
- What must be clear at closing
- Every lien on the collateral: paid and released, or formally subordinated
- Common cause of a slipped closing
- A late-found UCC filing, cash advance or tax lien with no payoff letter ready
Why the new lender needs a clean slate
An acquisition lender underwrites a loan on the basis that it will hold a first lien on the business's assets, and in most deals a pledge of the shares or membership interests as well. It cannot hold a first lien if someone else already has one. A lien follows the collateral, not only the debtor, so even in an asset purchase, where the seller's entity keeps its debts, a creditor with a filing against the equipment or receivables being sold keeps its claim on them after the sale unless it is paid and releases them.
That is why every acquisition commitment carries a closing condition along the lines of: evidence that all existing indebtedness has been repaid and all liens released, other than permitted liens. The UCC-1 financing statement is how most business lenders record their lien; a blanket lien covers everything the business owns. Clearing them is a mechanical task, but it depends on third parties who have no stake in the buyer's timetable.
The sequence, from lien search to release
| When | What happens | Who drives it |
|---|---|---|
| Before the letter of intent | The seller discloses its debts on a debt schedule; the buyer asks for copies of notes and leases | Seller, buyer |
| At the lender package | The target's debt schedule goes into the financing model and the sources and uses | Buyer, adviser |
| During underwriting | Lien, tax lien and judgment searches against the company, the seller's entity and often the owners, in each state where they are organized or operate | New lender or its counsel |
| Once liens are known | Payoff letters requested from each creditor, with a good-through date near closing | Seller, with buyer's counsel chasing |
| Days before closing | Bring-down search to catch anything filed since the first search; payoff figures updated for the actual date | Lender's counsel |
| At closing | Funds flow wires each payoff directly to the creditor from the purchase price; the seller receives the balance | Closing agent or escrow |
| After closing | Creditors file UCC-3 terminations, release titles, and close accounts; the lender confirms | Paid-off creditors, then lender's counsel |
The payoff letter is the document the whole process rests on. It states the principal, accrued interest, any prepayment penalty and fees as of a date, the daily amount that accrues after it, wiring instructions, and the creditor's agreement that on receipt of the stated sum it will release its liens and file a UCC-3 termination, or authorize the buyer's side to file one. Lenders will not accept a phone call or an online balance in place of it. What a good payoff letter contains is covered in the business loan payoff letter.
How the payoff shows up in sources and uses
Paying off the seller's debt is usually not an extra cost to the buyer. It is part of the price, routed to the creditors instead of the seller. In a cash-free, debt-free deal the headline price stays the same and the seller's net proceeds fall; see what cash-free, debt-free means. The sources and uses can show it either way, as long as the funds flow matches.
| Sources | Amount | Uses | Amount |
|---|---|---|---|
| Senior acquisition loan | 6,000 | Payoff of seller's bank term loan | 1,400 |
| Seller note | 1,000 | Payoff of seller's equipment loan | 250 |
| Buyer's equity | 1,300 | Payoff of seller's merchant cash advance | 350 |
| Balance of the price to the seller (5,000 cash plus the 1,000 note) | 6,000 | ||
| Working capital to the business | 150 | ||
| Closing costs and fees | 150 | ||
| Total | 8,300 | Total | 8,300 |
Two points matter to the lender here. First, the payoffs must be accurate: a payoff that turns out larger at closing, because of a prepayment penalty or a missed advance, comes out of the seller's net proceeds only if the purchase agreement says so. Second, if the seller's net proceeds are small relative to the payoffs, the seller has little incentive to cooperate on late surprises. A lender will look at that ratio.
Debt by debt: what each needs
| Type of debt | Usual treatment | What to watch |
|---|---|---|
| Bank term loan or line of credit | Paid off; UCC-3 filed; any deposit account control or lockbox arrangement ended | Prepayment penalties, swap breakage, and letters of credit issued under the line that must be cash-collateralized or replaced |
| SBA loan held by the seller's company | Paid off, or in some cases assumed with the lender's and SBA's consent | Prepayment fees on 7(a) loans of 15 years or more in the first three years; liens on the owner's home that also need releasing |
| Equipment loans | Paid off, with lien or title released; sometimes assumed with the lender's consent | Vehicle and titled equipment need title releases, not just a UCC-3 |
| Equipment leases | Bought out, assumed with the lessor's consent, or left in and counted as debt | Whether the lease is really a financing; see lease vs loan |
| Merchant cash advances | Paid off in full at closing; the funder's UCC released | Multiple advances from different funders; filings against the owner personally; daily debits that continue until the payoff arrives |
| Federal or state tax liens | Paid, with a certificate of release, before or at closing | Tax liens can take priority over the new lender; see federal tax lien |
| Shareholder loans to the company | Repaid from the price, forgiven, or converted to a seller note | If kept, they must be subordinated to the new lender |
| Judgment liens | Satisfied and released of record | Often unknown to the seller until the search finds them |
Merchant cash advances and the late-found filing
A frequent closing surprise is a merchant cash advance the seller did not mention, or mentioned as one when there are two. Advances are often taken quickly, sometimes stacked, and funders file UCC-1s that cover receivables and frequently all assets. Some also take a personal guarantee or file against the owner. A seller who thinks of the advance as a sales arrangement rather than a loan may simply not list it.
At closing the advance is handled like any other debt: a written payoff figure from the funder, a wire from the funds flow, and a UCC-3. The complications are practical. The payoff figure depends on how much has already been collected by daily or weekly debits, so it has to be fixed for the closing date and the debits stopped. Some funders are slow to confirm a figure or to release the filing. Where the new financing is an SBA loan, the structure matters too: SBA will not refinance an active merchant cash advance, so SBA lenders expect the advance to be retired from the seller's proceeds, not carried into the new company as debt the buyer's loan refinances. From 1 October 2026 an advance becomes eligible for SBA refinancing only once converted to a term loan that has amortized for at least 24 months with no new advance since. More on how advances are unwound is on MCA refinancing and refinancing merchant cash advances into term debt.
Run the lien search early, against every name the business and the owner have used. Anything it finds can be planned; anything found at the bring-down search moves the closing.
Assuming debt instead of paying it off
Some buyers hope to keep the seller's cheap debt, typically an equipment loan, a vehicle fleet loan or a real estate mortgage. It can be done, but it is the exception. Most business loans contain a change of control clause that makes a sale of the company an event of default, and most asset-secured loans prohibit transfer of the collateral without consent. Assumption therefore needs the existing lender's written consent, a credit review of the buyer, and usually new guarantees from the buyer in place of the seller's.
The new acquisition lender also has to agree. An assumed loan keeps its lien, so the new lender either carves the financed asset out of its collateral or signs an intercreditor agreement. It counts the assumed payments in debt service and the balance in leverage, exactly as if the buyer had borrowed it new. Assumption changes who the lender is, not how much debt the business carries. More on how an assumed or retained loan is treated after a change of owner is on change of control as a loan default.
Keeping the closing on schedule
- Get a complete debt schedule from the seller with the letter of intent, including leases, advances, shareholder loans and anything personally guaranteed.
- Order the lien, tax lien and judgment searches as soon as the lender is engaged, not in the closing week, and search every legal and trade name used.
- Request payoff letters as soon as the searches are back, then refresh them for the actual closing date.
- Confirm who files each UCC-3 and title release, and whether the payoff letter authorizes the buyer's side to file if the creditor does not.
- Put a clause in the purchase agreement that any debt found after signing is paid from the seller's proceeds.
- Stop automatic debits on advances and loans for the closing date, so the payoff figure holds.
Transparent's package starts from the target's debt schedule and the copies of the notes being paid off, so every payoff is in the financing model and the sources and uses before a lender sees the deal. That does not replace the lender's own search, but it means the search confirms the schedule rather than rewrites it. See the package.
Common questions
- Does the buyer pay off the seller's loans?
- The loans are paid from the purchase price at closing, so economically the seller pays them. The funds flow wires each payoff directly to the creditor and the seller receives the balance.
- What if the seller owes more than the purchase price?
- Then the creditors will not all be paid in full from the proceeds and will not release their liens without a negotiated settlement. The deal cannot close on a clean lien position until the shortfall is resolved.
- Do I need a UCC-3 termination for every lien?
- The new lender needs evidence that each lien on the collateral is released. For most business debt that is a UCC-3 termination; titled vehicles and equipment also need title releases, and tax liens need a certificate of release.
- Can I take over the seller's equipment loan?
- Sometimes, with the equipment lender's written consent and the new acquisition lender's agreement. The assumed loan still counts in your debt service and leverage.
- What happens to a merchant cash advance when a business is sold?
- It is normally paid off in full at closing and the funder's UCC filing released. The payoff figure must be fixed for the closing date and the daily or weekly debits stopped.
- In an asset purchase, do the seller's debts matter?
- Yes. The debts stay with the seller's entity, but any lien on the assets being sold must be released at closing, or it follows the assets to the buyer.