We receive many questions about various aspects of selling a business, from valuation methods to taxes on selling a business to when to tell employees you are selling. Another important consideration: “What happens to cash when selling a business?”
Normally, cash is not included as an asset when selling a business. This means the business owner (Seller) keeps all cash when selling a business, including petty cash, money in bank accounts, and cash equivalents.
Why Cash Goes with the Seller When Selling a Business (Usually)
It may sound counterintuitive, but think about what happens to cash when selling a business the same way you think of what happens to debt when selling a business.
Just like debt on a business follows the Seller, cash in the business also follows the Seller.
Consider that any cash in the business could be used to repay debt; likewise, the amount of cash in the business can be increased by borrowing more. In this way, debt and cash are linked. Because of this link, business sale transactions are generally structured on a cash-free, debt-free basis.
“Cash-free, debt-free” means that a company’s cash and debt are excluded from what the Buyer is buying, so the Seller keeps them both. The Buyer pays the purchase price, and out of that purchase price the Seller pays any expenses or fees, repays any outstanding debt, and pays any taxes due. The Seller also gets to keep and use the cash in the company toward these expenses.
Exceptions to the typical “Seller keeps the cash” scenario are in businesses where cash is a key component of working capital requirements. These include businesses that must have cash on hand (like a check-cashing business or pawn shop) or in cases where there are customer deposits, like events and catering companies.
In the vast majority of cases, cash in the bank is for the Seller to keep, and as such, should be considered part of the Seller’s proceeds of sale when anticipating how much they will net after closing costs and taxes.
Depending on the structure of your business, things may be a bit more complex, so it is important to seek the counsel of trusted professionals who can help you navigate the specifics of your situation. Our seasoned business brokers and advisors have a wealth of experience and would be happy to help. Contact us today for a complimentary consultation.