Money can be considered a taboo topic of conversation in some circles. As a rule of thumb, you do not speak about salaries, debt or the cost of your most recent vacation with friends or family, do you? We understand that, but when it comes to selling a business, we need to talk about money, specifically cash.
What is cash and how does it affect your business when you are selling it?
When you are selling a business, there are many variables you should consider — whether directly or indirectly involved with the sale.
For one, what happens to cash when you sell a business? That is a great question — it might be difficult to understand what assets are and are not relevant at this stage.
The simple answer? Most of the time, cash does NOT need to be an asset of the business at the time of a sale. The business owner should retain all cash (or cash equivalents) after the sale.
Surprisingly to many, this includes bonds, petty cash, money in bank accounts, etc.
But, why is cash not an asset? The main reason why cash should not be treated as an operating asset during a sale is that the buyer usually will have their estimates of working capital.
Most often the cash in pass-through entities like S Corporations or LLCs was generated through profits, which the owner already paid taxes on. Or the cash could be due to monies that were borrowed by the company.
Therefore, when selling a business, the seller either feels they“own the cash” or need to pay it back. For these reasons, cash most often remains with the seller.
On the other hand, sometimes cash could be a key component of working capital requirements in certain business models.
Businesses that require cash on hand, like pawn shops, ATM businesses or check cashing stores. Especially in the case where there are customer deposits or warranty issues like catering/event facilities or contractors.
In conclusion, 99% of the time, the cash in the bank is for the seller to keep. And that should be considered by sellers as part of their proceeds of sale when planning on how much the sellers will net after the closing costs and taxes that affect the sale.
The above gets more complicated depending on the structure of your business and the deal you are contemplating. It is important to understand the future income and tax implications. To gain a better understanding of how cash is handled in your potential business sale transaction, contact a business broker to assist with the sale of your buisness.
Editor's note: Ashley Kelsey is a Business Broker at Transworld Business Advisors of Eastern North Carolina. She can be reached at 910-302-6447 or email firstname.lastname@example.org.