What Happens to Cash When Selling a Business?

Kratos Capital
December 18, 2023

When a middle-market business owner decides to sell their company, one of the most critical questions that arise is, "What happens to the cash when selling a business?" This is a pivotal aspect of the transaction, often surrounded by complexities and strategic decisions. At Kratos Capital, our Dallas-based M&A advisory firm with a rich history in facilitating successful mergers, acquisitions, and corporate finance across various industries, we understand the nuances of this process. Our approach, rooted in the philosophy of "quality over quantity," ensures that we provide tailored, insightful guidance to business owners navigating a sell-side transaction.

Understanding the Role of Cash in Business Sales

In the realm of middle-market transactions, cash plays a multifaceted role. It's not just a matter of how much money the seller receives; it's also about how the existing cash in the business is treated. Typically, the handling of cash in a business sale can be categorized into two broad scenarios:

  • Cash-Free, Debt-Free Basis: This is a common approach where the seller retains the cash on the balance sheet, and the buyer takes over the business free of cash and debt. Essentially, the seller liquidates the cash assets before the transaction, which can be used to pay off debts or distributed as dividends.
  • Including Cash in the Sale: In some cases, the sale includes the cash on the balance sheet. This scenario often occurs when cash is integral to the business operations, such as in companies with significant working capital requirements.

Strategic Considerations for Sellers

As a seller, understanding strategic options regarding cash in a business sale is crucial. Here are some key considerations:

  • Valuation Impact: The treatment of cash can significantly impact the business's valuation. Excluding cash from the sale might lower the headline sale price but can be beneficial if it leads to a higher net take-home for the seller.
  • Operational Needs: If the business requires a substantial amount of cash for day-to-day operations, buyers might insist on including cash in the sale to ensure smooth continuity.
  • Negotiation Leverage: The treatment of cash can be a point of negotiation. Sellers can leverage it to negotiate better terms or a higher overall sale price.

The Buyer's Perspective

From a buyer's perspective, understanding the cash position of a business is essential for several reasons:

  • Working Capital Adjustment: Buyers often require a certain level of working capital to be maintained in the business at the time of sale, which includes cash. This ensures the business can continue operating without immediate additional investment.
  • Risk Assessment: The cash position can indicate the business's financial health and operational efficiency, influencing the buyer's risk assessment and valuation.

Kratos Capital's Approach to Maximizing Value

At Kratos Capital, our focus is on ensuring that our clients achieve the best possible outcome in their transactions. Every business is different so we offer advice on your unique situation, no cookie-cutter approach here. Our senior investment bankers, with decades of experience are here to navigate your business sale with confidence. 

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