What Happens to Cash in the Bank When You Sell a Business?

Picture this: after years of hard work, you’ve decided it’s time to sell your business and reap the rewards of your dedication and perseverance. You’ve built a profitable enterprise, and you’re ready to hand over the reins to a new owner. But what happens to cash in the bank when you sell a business? The answer may not be as simple as you think.

This blog post will guide you through the complexities of handling cash during a business sale, exploring the role of sale and purchase agreements, business assets and liabilities, tax considerations, and more. Let’s dive in to ensure you’re well-prepared for this crucial stage in your entrepreneurial journey.

Short Summary

• Determining the fate of business cash during a sale is determined by purchase agreements and negotiations between buyer & seller.
• Assets such as furniture, fixtures, equipment & accounts receivable are typically included in an asset sale. Liabilities are often satisfied prior to transfer.
• Understanding implications of business structure on cash distribution and seeking professional advice for tax savings can ensure successful outcome when selling or buying a business.

Determining the Fate of Business Cash During a Sale

As a business owner, you’re well aware of the importance of managing cash flow and maintaining a healthy balance sheet. However, when the time comes to sell your business, you may be wondering what happens to the cash in your accounts. The fate of your business’s cash during a sale depends on several factors, including the terms of the purchase agreement and negotiations between you and the prospective buyer.

One key component to understand is the concept of working capital. In most business sale transactions, the company’s cash, including petty cash, is not considered an asset to be sold, but rather a part of the company’s working capital. Working capital is generally defined as the cash, accounts receivables, and accounts payable required to cover the ordinary expenses of the business on a debt-free basis.

In the following sections, we’ll explore the role of purchase agreements and negotiations in determining the fate of your business’s cash during a sale.

The Role of Sale and Purchase Agreements

Sale and purchase agreements play a significant role in determining what happens to cash during a business sale. These documents outline the terms of the sale, including the allocation of cash and other assets, which are reflected on the balance sheet. The manner in which cash is treated in the sale often depends on the type of sale transaction, such as an asset sale or a share sale.

In an asset sale, which is what this blog will focus on, the buyer acquires specific assets and liabilities but does not take on the entire business entity. This type of sale may be more appealing to buyers, as they can benefit from depreciation of costs paid for the assets, thus reducing their tax burden.

On the other hand, a share sale involves purchasing the shares of a company. In this scenario, the buyer would be taking on all its assets and liabilities. The way cash is treated in the sale will depend on the specific terms outlined in the purchase agreement, which should be carefully reviewed with the assistance of legal professionals, although it would almost always be included in a share sale.

Here at GZ Legal, our lawyers can draft and review sale and purchase agreements to make sure your interests are full protected. Click here to find out more.

Negotiating the Allocation of Cash

While the sale and purchase agreement outlines the terms of the sale, there is often room for negotiation between the buyer and seller regarding the allocation of cash. Some buyers may require a certain amount of working capital to be included in the transaction to cover expenses without having to inject additional funds beyond the purchase price of the business. In such cases, the seller can include cash in the sale, but it is advisable to increase the business’s purchase price accordingly.

It’s essential for both the buyer and seller to communicate effectively and understand each other’s positions during these negotiations. By working together, they can reach a mutually beneficial agreement that ensures the appropriate allocation of cash and a smooth transition for both parties. The key is to be transparent and open about intentions and expectations regarding cash, which we’ll discuss later in the blog.

Understanding Business Assets and Liabilities in a Sale

When selling a business, it’s crucial to have a clear understanding of the business’s assets and liabilities as they play a significant role in determining the value of the business during the sale process. Assets, such as furniture, fixtures, equipment, and accounts receivable, are typically included in an asset sale, while cash is generally excluded. On the other hand, liabilities and debts are often paid off by the seller during an asset sale, ensuring a smooth transition for the buyer.

In the following sections, we’ll explore the assets included in a business sale and the process of addressing liabilities and debts during the sale.

Assets Included in a Business Sale

The sale of a business by asset sale involves the transfer of various assets to the buyer. It is important that this process takes place properly in order to ensure a successful transaction. These typically include:

• Furniture
• Fixtures
• Equipment
• Accounts receivable

These assets are considered as they constitute debts owed to the seller by customers. Cash, on the other hand, is usually excluded from the assets included in the sale. This exclusion is due to the fact that cash is generally considered a part of the company’s working capital, which is used to cover the ordinary expenses of the business.

Liabilities and Debts in a Business Sale

Addressing liabilities and debts is a crucial aspect of a business sale. The seller must often satisfy all liabilities and debts prior to the sale, thereby ensuring a seamless transition for the buyer. This process may involve using existing cash reserves to repay debt or negotiating the allocation of cash in the purchase agreement.

For buyers, a business with no existing debt presents the advantage of avoiding the assumption of additional liabilities and debts, thus reducing risk. In such cases, the seller may choose to utilise the business’ cash to settle the existing debt, or the buyer and seller can negotiate on how to allocate the cash during the sale process.

The Impact of Business Structure on Cash Distribution

The structure of your business can have a significant impact on how cash is distributed during a sale. Sole traders and partnerships have different regulations compared to companies when it comes to handling cash during a sale. In this section, we’ll explore the differences between these business structures and how they affect cash distribution.

It’s important to note that the manner in which payments are organised when purchasing or selling a business, such as a lump sum or instalments, is contingent upon how the deal is structured and financed. Understanding the implications of your business structure on cash distribution is crucial for navigating the sale process and ensuring a successful outcome for both the buyer and the seller.

Sole Traders and Partnerships

In sole traders and partnerships, cash distribution during a sale is typically straightforward. The seller retains the cash after settling debts and liabilities, and the buyer acquires the remaining assets of the business. It’s important for the seller to ensure effective cash flow management during the sale process.

When managing cash flow in these types of businesses, it’s essential to monitor expenses, collect receivables, and manage stock levels. Additionally, having a plan in place to guarantee sufficient funds for financial obligations is crucial for ensuring a smooth sale process and transition to the new owner.

Companies

In companies, cash distribution during a sale may be more complex. Shareholders of the company receive proceeds from the sale after liabilities and debts are addressed. This process requires adherence to company laws and regulations prohibiting distribution if the company cannot pay all of its debts.

When distributing cash in companies, it’s crucial to ensure compliance with these regulations and seek professional advice to navigate the intricacies of cash distribution during a sale. Proper planning and communication between the buyer, seller, and their respective legal and financial advisors can help ensure a successful outcome for both parties.

Tax Considerations When Selling a Business

Tax considerations play a significant role in business sales, as the proceeds from the sale are typically subject to capital gains tax. Additionally, structuring the sale for tax savings can help minimise tax liabilities for the seller. In this section, we’ll delve into the implications of capital gains tax and explore strategies for structuring the sale to optimise tax savings.

It’s essential for both buyers and sellers to understand the tax implications of different types of sale transactions, such as asset sales and share sales. By having a clear understanding of these implications, you can make informed decisions that will benefit you in the long run.

Capital Gains Tax

Capital gains tax applies to the proceeds from a business sale, with cash received being treated as income. The applicable rate of tax is either 10% or 20%, depending on the amount of taxable income or capital gains received. It’s essential for sellers to be aware of their potential tax liabilities and plan accordingly.

One relief that can reduce the rate of capital gains tax for sellers is Business Asset Disposal Relief (BADR). This relief can reduce the rate of capital gains tax to 10% on the first £1 million of gains (over an individual’s lifetime) when selling a qualifying business. By taking advantage of this relief, sellers can potentially save a significant amount of money on their tax bill.

Structuring the Sale for Tax Savings

Sellers should structure the sale with the intention of minimising their tax liabilities. Companies may retain accounts receivables and wait until they receive payment before paying income taxes. This is done instead of paying taxes during the sale. It’s important to seek professional advice to optimise the outcome, as navigating tax considerations in a business sale can be complex.

Meeting with an accountant or tax expert can be very helpful for minimising the taxes you have to pay when selling your business. It can also help you save money in the long run. These professionals can guide you through the process, ensuring that you’re well-prepared for any tax implications and are making the most of any available tax savings opportunities.

Preparing Your Business for Sale: Managing Cash and Bank Accounts

As you prepare your business for sale, managing cash flow and bank accounts is of utmost importance. Proper cash management ensures a smooth transition for the buyer and minimises any potential disputes or complications during the sale process. In this section, we’ll discuss the steps involved in assessing your business’s cash flow and transferring business bank accounts to the new owner.

By following these steps and working closely with financial and legal advisors, you can ensure that your business is well-prepared for the sale and that the cash and bank accounts are properly managed throughout the process.

Assessing Your Business’s Cash Flow

Evaluating your business’ cash flow is an essential step in preparing for a sale. To do this, you’ll need to analyse key financial metrics, such as the operations/net sales ratio, free cash flow, and comprehensive free cash flow coverage. You should also identify and assess any superfluous expenses that could be reduced or eliminated to optimise outgoing cash flows.

By understanding the timing of cash flows and having a solid understanding of your business’ financial health, you can determine the ideal amount of cash to keep on hand during the sale process and ensure a smooth transition to the new owner.

Transferring Business Bank Accounts

Transferring business bank accounts to the new owner is a crucial aspect of the sale process. To do this, the buyer must provide the necessary documentation, such as a copy of the business’s Articles of Incorporation or a copy of the business’s operating agreement. The buyer should then contact the bank to complete the transfer process for the business bank account.

The buyers and sellers should work together to ensure a smooth transition of the bank account. Both parties should strive to facilitate this process.

Common Challenges and Solutions in Handling Cash During a Business Sale

Handling cash during a business sale can present challenges that need to be addressed for a successful outcome. Some common challenges include:

• Managing cash flow
• Ensuring that all cash is accurately tracked and transferred to the new owner
• Addressing any outstanding debts or liabilities that may impact cash flow

In this section, we’ll explore solutions to these challenges, such as ensuring transparency and trust between the buyer and seller, and addressing disputes over cash distribution. By being aware of these challenges and implementing the solutions discussed, you can navigate the complexities of handling cash during a business sale and ensure a successful outcome for both parties involved.