Whether you’re exiting your business for retirement or looking for a new challenge, it’s important to understand what happens when you sell.
One common question from business owners: what happens to cash when selling a business?
In this post, we’ll explore what happens to cash in a variety of scenarios to help you make informed decisions when you decide to sell.
What Happens to Cash When Selling a Business?
When the purchase price is finalized and a business is sold, any proceeds from the sale are distributed among the parties involved in the transaction. This includes the seller, the buyer, and any lenders or creditors.
The exact distribution of cash will depend on working capital needs, the terms of the sale agreement, and any outstanding debts or obligations.
To get to the punchline, in the majority of scenarios, the all the cash in the bank is for the seller to keep.
With that said, let’s dig into a couple scenarios to help clarify how this plays out.
Who Gets the Cash in an Asset Sale?
In an asset sale, the buyer is only acquiring specific assets that are agreed upon in the sales contract. In the majority of scenarios, the cash balance is excluded from the sale.
The seller typically continues to repay debt or liabilities (i.e. accounts payable, interest payments) – anything outside of the specific assets being sold.
Who Keeps the Cash in a Stock Sale?
In a stock sale, the buyer acquires the ownership of the full company, including the stock and all assets (including cash, tangible and intangible assets).
It’s possible for the cash to remain with the company to support the future growth and operations of the business.
The new business owner is responsible for all of the debts and liabilities of the company, as well as any future liabilities that may arise. It also means that the new owner has full control over the company, including its assets and future operations.
I’ve written a post around asset vs. stock sales if you’re interested in learning more.
Who Keeps Cash Accounts Receivable?
Accounts receivable (AR) refer to the money that is owed to a business by its customers.
In almost all scenarios, the seller keeps the accounts receivables and pays off the accounts payable – so the buyer gets the company on a debt free basis.
After closing, the buyer has has a fresh start with clean cash flow.
How Much Cash Should You Leave When Selling a Business?
The amount of cash you should leave when selling a business depends on a number of factors, including the size and nature of the business, the industry, and the terms of the sale.
As a general rule, it’s a good idea to leave enough cash to cover any ongoing expenses for a period of time after the sale. In some negotiations, the working capital ratio (current assets divided by current liabilities) is used to decide how much cash should be required.
For example, if the business has significant ongoing expenses, it may be necessary to leave more cash in the business to cover these costs for a period of time after the sale.
This may include expenses like employee salaries, rent, utilities, and petty cash. The logic is that this gives the new owner time to get the business up and running and ensure a smooth transition.
At the end of the day, it’s a negotiating item based on what’s best for both parties in the transaction.
Transfer Business Bank Account to New Owner
After both parties agree on how much capital will be left behind after buying or selling your business, it’s important that remaining funds are transferred properly and securely.
Once the sale of your business is complete, it’s important to transfer any bank accounts to the new owner. This will ensure that any ongoing transactions are made under the new ownership and that the funds are properly accounted for.
It’s also important to consider closing any other accounts, such as credit card accounts or lines of credit, that are associated with the business.
Does Selling a Business Count as Income?
The short answer: yes.
When it comes to selling a business, it’s important to understand the tax implications of the transaction.
The sale of a business is considered to be a capital gain or loss, which you will need to pay taxes on. The amount of the gain or loss is determined by subtracting the cost basis of the business from the sale price. The cost basis is the original purchase price of the business, plus any improvements or upgrades made over the years.
Make sure to work with a tax professional to ensure that you understand the tax implications of selling your business.
If you’re interested in a deeper dive, I’ve written a detailed post on how to limit tax obligations on your sale.
What Happens to the Money When You Close a Business?
Closing a business can be a difficult decision, but it’s important to understand what happens to cash in this scenario as well.
If you have outstanding debts or liabilities, the cash in the business may be used to pay these off before any remaining funds are distributed to the owners. If the business is a partnership or corporation, the cash may be distributed to the owners according to the terms outlined in the operating agreement or corporate bylaws.
If the business has significant assets, including cash and cash equivalents, it may be sold to help pay off any outstanding debts or to provide a return for the owners. The proceeds from the sale of assets will be used to pay off any debts and any remaining funds will be distributed to the owners.
As always, consult with an M&A lawyer and accountant to work through specifics for your unique situation.
Wrap Up
A business sale can be a complex process, and understanding what happens to the cash is just one piece of the puzzle.
As a business owner, it’s important to fill in any blind spots you have and work with a knowledgeable M&A advisor to ensure a smooth and successful sale.
This can help to avoid any legal issues in the future and ensure a smooth transition for everyone involved.
If you’re interested in a deeper dive, I have a full series of posts around the sales process:
- Checklist for Selling Business
- How to Find the Perfect Buyer for Your Business
- IOI vs. LOI: Everything You Need to Know
- Rollover Equity
- Selling Your Business to Employees
- Minimizing Tax in a Business Sale
- Value Drivers: Boosting Your Valuation
- Commercial Due Diligence
- Financial Due Diligence
- Legal Due Diligence
