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Maximizing the Value of Your Business Sale With Cash Management Strategies

Team Acquira
-  April 12, 2024
What You’ll Learn
  • The importance of evaluating a business’s cash position before selling.
  • How cash influences overall business valuation.
  • Differentiating between liquid and non-liquid assets in a sale.
  • Addressing outstanding debts and their impact on valuation.
  • Navigating tax implications during a business sale.

You’ve worked hard to grow your business and now you want to sell. It's obvious you should want to earn as much money as possible through that sale. Effective cash management strategies can help ensure you do.

Evaluating cash positions, understanding assets, settling debts, and navigating tax implications are essential. 

Ensuring you’re well acquainted with the financial nuances not only helps in achieving a fair sale but also guarantees that the transaction is smooth and devoid of unwanted surprises.

Let’s take a look at how cash management strategies can help you get the most out of your business sale. 

Current Cash Position

cash management strategy

Before you dive into the sale, it’s essential to evaluate the current cash position of your business. 

Why? 

Because cash, often considered the lifeblood of any business, plays a pivotal role in determining its overall valuation. 

Read more: Everything You Need To Know About Business Valuation

A healthy cash flow and solid reserves indicate a thriving business, which can be an attractive proposition for potential buyers.

However, gauging the accurate cash value isn’t something you should do alone. 

Financial experts can offer invaluable insights. Their expertise can help you determine not just the present cash value but also project future cash flows, which can significantly influence a buyer’s decision.

Acquira is very well versed in this aspect of small business valuations. 

Cash as a Part of a Business Valuation & Business Sale

When potential buyers evaluate a business, they’re not just looking at tangible assets or brand reputation; they’re keenly interested in cash and cash equivalents. 

These can range from the cash in hand to marketable securities or short-term government bonds that can be quickly converted into cash, as well as your accounts receivable 

A robust cash position amplifies the perceived value of your business, portraying financial stability and operational efficiency.

During the actual sale, it’s essential to distinguish between operating cash and excess cash.

 Operating cash is what the business needs for daily operations, while excess cash is surplus and can be distributed to the business owner before the sale, provided you leave adequate working capital for the new owner.

Often, the purchase price is adjusted based on this cash balance, so you’ll want to ensure there’s clarity on how much cash stays in the business post-sale.

Types of Cash and Assets

  • Liquid Assets:
    These are your cash reserves and assets that can be rapidly converted into cash, like marketable securities, accounts receivable, and short-term investments. Due to their easily convertible nature, liquid assets are attractive to buyers since they offer immediate value and flexibility. This is close in meaning to working capital, defined as current assets minus current liabilities, where “current” means convertible to cash within a year.
  • Non-Liquid Assets:
    Non-liquid assets, on the other hand, include fixed assets, real estate, long-term investments, and sometimes intellectual property. A company’s fleet is not a fully liquid asset: trucks may be relatively easy to sell, but perhaps at the cost of the business’s ability to remain a going concern. Non-liquid  assets are generally harder to convert into cash swiftly. When buying or selling a business, handling non-liquid assets can be challenging. They often require time for appraisal, and their value might be subjective. For instance, a piece of machinery might have a book value (its original cost less accumulated depreciation), but its market value could be different based on its condition and demand.

Debt Settlement and Liabilities

When preparing to sell your business, it’s essential to address any outstanding debts and liabilities. 

Clearing significant unresolved debts can enhance the business’s valuation and make it more attractive to potential buyers. 

It’s common for buyers in a Stock Purchase Agreement to request the settlement of specific debts before completing the transaction or to deduct certain liabilities from the purchase price. 

To offer a transparent picture and build trust, ensure you present all financial obligations to potential buyers, and consider consulting with financial experts to navigate these complexities effectively.

Distribution of Sale Proceeds

After selling your business, you’ll need to manage the distribution of sale proceeds among stakeholders, investors, or business partners based on prior agreements. 

It’s crucial to have clear legal agreements and contracts that detail these distributions. 

Being organized and transparent about this distribution not only ensures smooth transactions but also builds trust with buyers who may feel reassured about the clarity of the financial commitments you’ve made.

Tax Implications

strategies of cash management

Selling a business comes with tax implications. 

Depending on how the sale is structured, you might be liable for capital gains tax or other relevant taxes. 

There are also potential avenues to minimize tax burdens, such as availing yourself of tax breaks for small businesses or using the proceeds for specific investment vehicles.

Having someone who can understand your liabilities and explore strategies to optimize your after-tax proceeds from the sale is key.

Cash Negotiation in a Sales Agreement

The handling of cash and its related clauses often become pivotal negotiation points in the sales agreement. 

Negotiations related to working capital – current assets minus current liabilities – may be contentious. (“Current” means cash assets or assets which are convertible to cash within twelve months and liabilities which must be paid within twelve months, including the interest portion of debt.) An adequate cushion of working capital is critical because a company can be profitable but still collapse if deprived of cash flow, especially in the early months following a sale.

Terms related to cash adjustments, based on the business’s working capital or certain pre-agreed benchmarks at the time of sale, can be negotiated. 

You might also encounter discussions around escrow accounts, set up to address post-sale liabilities, or earn-out arrangements, where part of the payment is based on the future performance of the business. 

Being well-informed and prepared to negotiate these terms can ensure you secure favorable conditions in the agreement.

How to Maximize Your Cash Value?

As you approach the sale, consider strategies to maximize the value of your business and, by extension, the cash you receive from the sale. 

Improving cash flow, optimizing working capital, and presenting clean, organized financial records will make your business more attractive to potential buyers, allowing you to command a higher selling price. 

Examine areas where you can introduce efficiencies, renegotiate vendor contracts, or optimize operations. 

A well-managed business with clear financial records and growth potential can significantly enhance the cash value you derive from the sale.

In a business sale, cash is king.

In a business sale, cash is king. 

As we’ve discussed above, proper handling and management of a business’s cash can substantially boost its sale value. 

FAQs

How Do You Extract Cash From a Company Before Sale?

Before selling a company, owners can extract cash through dividends, salaries, or owner’s withdrawals. Each method has its tax implications and should be chosen based on the company’s structure (sole proprietorship, corporation, LLC, etc.). It’s crucial to ensure that any cash extraction doesn’t adversely affect the business’s value or breach any pre-sale agreements.

What is the Process By Which a Company Sells Accounts Receivable for Cash?

When a company sells its accounts receivable for cash, it’s often referred to as factoring. In this process, businesses sell their invoices to a factoring company at a discount in exchange for immediate cash. The factoring company then takes on the responsibility of collecting the debt. It’s a strategy used by businesses needing quick access to capital, especially if they have lengthy invoice cycles.

Is Cash Acquired in an Acquisition?

In an acquisition, whether cash is acquired depends on the terms of the purchase agreement. Typically, in an asset purchase, the acquiring company may decide to take over cash along with other assets. In contrast, in a stock purchase, the acquirer essentially buys the entire company, including its cash. The specifics are negotiated during the acquisition talks, and both parties must agree on how cash and other assets are treated.

When an Owner Invests Cash in the Business, What is the Effect?

When an owner invests cash into the business, it increases the company’s assets and the owner’s equity. It provides the business with additional liquidity, which can be utilized for operations, expansion, or settling liabilities. From an accounting perspective, the cash account on the balance sheet increases, and so does the owner’s equity or capital account, reflecting the owner’s increased investment in the business.

Conclusion

If you want to maximize the value of your business:

An accurate evaluation of the business’s cash position is pivotal to its valuation and attractiveness to buyers. 

Distinguishing between different types of assets, settling debts, and understanding tax implications are all vital steps in the selling process. 

Negotiating cash terms in the sales agreement can also influence the sale’s outcome. 

To maximize a business’s value, owners should focus on improving cash flow, optimizing working capital, and maintaining transparent financial records. 

This careful management and understanding of cash, assets and working capital  can substantially enhance the sale value of a business.

If you’re looking to sell your business and want to get the most out of the deal, reach out to Acquira today to find out how much your business is worth

Key Takeaways

  • Cash management is pivotal in business sales.
  • Liquid assets can enhance business attractiveness.
  • Settling debts boosts overall business value.
  • Sales agreements require astute cash negotiation.
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