What happens to all the cash when you sell your business? It's a critical question with big implications. Those reserves in your accounts or the petty cash fund - do you get to keep it all? Does the new owner expect that money?
We'll unpack the typical outcomes across common scenarios so you can set proper expectations before signing on the dotted line. Both sellers and buyers need to understand how cash works in these deals.
Get the answers on receivables, valuations, negotiations, and taxes, too. Let's dive in!
In most cases, sellers keep cash on hand or in bank accounts when selling their business. This cash is not considered a business asset that transfers to the new owner. Sellers can use these cash reserves to pay off debts and taxes or for personal use after the sale.
However, working capital requirements sometimes dictate that some cash remains with the business to fund ongoing operations under the new owner. The amount left is negotiated between the parties. Cash can also indirectly impact negotiations if it allows sellers to pay down debts before a sale.
As we dive into more detail around cash in the sale process, check out our 'selling a business checklist' for more great resources on preparing for a successful exit. It provides valuable insights to guide you through the complexities of selling your business.
Mapping out cash allocation early in the preparation stage gives the seller control over the sale process and protects their net profit. It provides the buyer with a clear picture of the business’s worth and the associated tax implications.
Here is how to go about it:
Working capital in M&A transactions can increase or decrease the final sale price and have unique nuances.
Here are tips to use to your advantage:
Knowing how proceeds are allocated helps transition ownership tax-efficiently and develop a better post-sale financial plan.
Here's what that looks like:
Deduct debt repayments, including loans, employee payables, credits, vendor debts, etc. With your M&A advisor's help, obtain payoff letters from your lenders days before closing to ensure a clean title transfer to the buyer.
Settle any fees related to the transaction, i.e., legal fees, accounting fees, broker commissions, and advisory fees. These costs are calculated as a percentage of the sale price and should be covered from the gross proceeds.
Generally, buyers often lock 10-20% of your business’s purchase price into an escrow account for 12-24 months. The amount is released in accordance with the terms of the escrow agreement. Rather than waiting until the time lapses, you can negotiate a staged release, in which a percentage of the funds is released after a specific time within the agreed period.
Based on your sale structure, calculate the amount needed for capital gain tax (CGT) and any other taxes. Set the funds aside. Modeling after-sale proceeds in advance allows you to strategize on reducing liabilities.
After settling all deductions, allocate the remaining funds to shareholders in proportion to their ownership stakes. Also, consider the terms of the company’s operating agreement.
Factor in bonuses for key employees. It is a strategic investment meant to reward employees who have helped build the business. It helps protect your valuation by ensuring key staff stay and maintain operational stability under the new ownership.
Now that we've covered the high-level overview, let's explore some common questions regarding cash for buyers and sellers when selling a business.
Yes, it is standard practice for sellers to retain any cash in the business at the time of sale. This includes physical petty cash funds along with money in checking or savings accounts.
The logic here is that cash is not an operating asset but a part of the company's net working capital. Working capital refers to the liquid assets needed to cover short-term operating expenses.
Since cash could be used to repay debt or borrowed to increase reserves, it is linked to debt and excluded from most transactions.
With cash removed and debt, business sales are structured on a "cash-free, debt-free" basis. Sellers keep responsibility for debts and get to retain cash to help pay these off or for personal use after the sale.
From a buyer's perspective, physical cash or reserves are rarely viewed as assets when valuing a business or negotiating the purchase of a business. The price paid focuses more on fundamental performance and the underlying potential to generate profits.
That said, buyers do have working capital requirements to ensure smooth ongoing operations under the new management. So, purchase agreements may dictate that sellers leave some cash behind to cover near-term bills or expenses.
The amount left is negotiated between parties based on estimates of capital needed. Buyers may also inherit cash implicitly if they opt for a complete stock purchase, taking on all company assets and liabilities.
As you navigate the buyer-seller cash considerations in an M&A deal, you may need expert guidance and support to ensure a smooth and successful transaction. Exitwise can guide you in this process, helping you interview, hire, and manage your dream M&A team and ensuring you achieve maximum value.
We've covered what typically happens to cash itself during a business sale. Now, let's look at how some other closely related assets are treated regarding outstanding cash receivables.
Accounts receivable refer to any outstanding payments owed to the business by customers or clients. These outstanding cash receivables are assets that can be transferred to the buyer, remain with the seller, or land somewhere in between, depending on negotiations.
Most buyers want control of receivables to avoid an ongoing relationship with the former owner. However, sellers may keep receivables if they feel buyers won't correctly account for or aggressively collect this money. Hybrid splits are also possible.
The buyer and seller should communicate openly their preferences to find a mutual agreement regarding accounts receivable. This allows both to avoid unexpected conflicts down the road.
Petty cash funds used for small purchases are considered the seller's assets. This cash on hand goes to sellers and money in bank accounts—not to the new business owner. Checks or physical money in the register remains the seller's property at the time of sale.
However, buyers require cash for operations immediately after taking over. So, similar to bank account reserves, a negotiated amount stays with the business. Enough petty cash for a week or two of operations is typical.
A business checking account is technically an asset - representing cash funds held at the bank. However, the dollar balance does not transfer to buyers as an asset for reasons covered. Sellers retain ownership of all money deposited.
That said, the checking account infrastructure and banking relationship are conveyed to the new owner in an asset sale. Buyers take over account numbers, cards, and online login access even while sellers keep the existing cash balance. This facilitates continuity for customers and vendors.
New owners then fund the account with capital from their own reserves or financing secured for the acquisition.
[Note: An exception is a total stock sale where buyers may wholly acquire cash accounts.]
Now, let's shift gears to discuss how cash can impact the overall valuation and negotiations when selling a business.
Now, let's shift gears to discuss how cash can impact the overall valuation and negotiations when selling a business.
Cash levels do not directly impact business valuation models or offers from buyers. Sale pricing stems from performance fundamentals, assets, branding, contracts, staff, and profit potential. Cash is accounted for separately.
That said, ample reserves allow sellers to clean up balance sheets beforehand by eliminating debt. This can strengthen negotiating power. Sellers with cash have the flexibility to wait for better-aligned buyers and deals. However, it's essential not to delay too long when seeking the right buyer, as that can also introduce risks.
Customarily keeping cash enables owners to handle lingering payables post-close along with the tax burden on sale proceeds. So, cash strengthens the position of sellers in transactions even if not part of formal valuations.
See examples of successful sales facilitated by Exitwise's alignment of specialized M&A experts. We leverage our global network to assemble tailored M&A dream teams and empower owners to maximize valuation and unlock the full potential value for their life's work.
Given that cash is tied to debt rather than core business value, buyers rarely adjust offers based solely on the cash balance. Again, the negotiation centers around identifying working capital and near-term funding needed to operate smoothly.
Any price adjustments would relate more to major changes in debt levels due to sellers paying these down with cash ahead of a sale. Even there, buyers look at profitability rather than asset-level movements when calibrating offers.
You can think of cash and debt as close to neutral factors in the actual business valuation and pricing decisions from the buyer side. Performance fundamentals take priority.
Absolutely. While cash may not directly alter valuation models, ample reserves empower sellers with greater negotiating leverage.
Overall, cash strengthens the seller's position during deal discussions.
Yes, the cash received from a business sale does carry tax obligations. Specifically, the money gained is treated as capital gains income.
The capital gain/loss amount is calculated by subtracting the essential cost of acquiring the business originally from the final sale proceeds.
Work with a specialized tax expert when selling to understand estimated obligations. Planning ahead is crucial, as the taxes owed on cash received can take a significant bite out of sale proceeds if not proactively managed. Maximizing write-offs where possible also helps minimize the tax burden.
Be sure to start conversations early about optimizing for taxes across the entire sales process - well before closing documents are signed.
Let’s look at more questions asked by most business owners planning to sell their companies.
The cash on the balance sheet is part of the sale and helps pay off the outstanding debt. Buyers want to inherit a debt-free business, as typically reflected in the purchase price. That means that if debts exceed cash, you must cover the shortfall.
Yes, at closing, the seller keeps all the accumulated cash in the company, including funds held in the bank and petty cash. They only leave the new owner with enough working capital to fund day-one operations. That means the seller must withdraw anything above that before the deal closes.
If the business is handed over with more or less working capital than the agreed target ‘peg ’, it may result in a lower or an increase in your business’s final proceeds. In scenarios where the actual working capital exceeds the peg ‘target’, you are allocated additional proceeds. If it is less, the purchase price is reduced, lowering your proceeds.
Pre-closing cash usually belongs to the seller, but buyers can claim it in specific scenarios:
In most cases, the buyer receives the cash held in escrow.
Cash is a vital consideration as you prepare yourself to sell your business. While sellers customarily retain cash balances from both bank accounts and on hand, negotiations around working capital needs still have a significant impact. Buyers may also inherit cash indirectly in stock sales.
Careful preparation and guidance around cash help ensure owners achieve the best possible outcome when selling their life's work.
As you navigate these cash considerations in a potential business sale, leverage Exitwise's dedicated support to assemble the right M&A team for your needs. Our experts simplify the process to sell your company faster and for maximum value. Book a call with us today!
Let Exitwise introduce, hire and manage the best, industry specialized, investment bankers, M&A attorneys, tax accountants and other M&A advisors to help you maximize the sale of your business.
