3 crucial examples of what happens to cash when selling a business

A very common question comes up in the process of an acquisition, Who keeps the cash?

There is no direct answer for this because there are many different types of businesses, in this article, we will go over some different types of businesses where cash may be included in the deal and where others leave you empty. When buying a business you gave up your life savings and just want to get to work and build the new business to start making a profit so yes it’s understandable to ask what happens to the cash in the business, you don’t want to have to take out the next loan to have money for inventory and paying employees the first week.

What’s included in the sale of the business?

These are the main questions you should ask when buying a business, to determine if the value of the business you want to buy is priced right, you will need to ask what’s included, now the price can be valued by many things, like trucks or office furniture and most importantly the sales and net income of the business.

Once you understand what’s valued you can start asking these questions about if there’s any cash around because the existing owner will take everything they can that was not included, yes this could even be the spare change in the register so your lawyer must write down everything in paper so there’s no fighting at the end.

Here below  listed which may have cash around and if this can be passed on to you after purchasing the business:

Example 1: Distribution business 

A distribution business deals with a lot of cash customers, these customers can be billed on the spot, end of the week of setting up on a bill to bill which means they pay the old bill and leave the new, and this cycles over and over, so whats does this mean to you? 

Well, this means that if the business has 20 customers set up this way there’s a lot of cash on the streets if each customer has a balance of $3,000 that’s about $60,000 who keeps it? Does the old owner go after the customers saying it is his or her money or do you continue the setup they had? The answer here will be you will have to decide do you want to leave the set up if so you will have to pay the old owner every dollar in the street.

Pros:

• Your new customers will continue buying, because of the outstanding balance.

• It has nothing of value, the business price should not be based on how much money is in the street.

• Your customers won’t be bothered or harassed by old owners looking for the balances.

Cons:

• Customers that owe money can always stop paying

• Customers can return inventory they purchased from the old owner and you have to credit them

Example 2: Retail business 

 Retail businesses can be anything from a clothing store to a grocery store, in these businesses deal with cash and credit card transactions, these acquisition deals typically leave you with no cash, all the cash is transferred to the seller, but what does that leave with you? 

Well, when buying these types of businesses there’s a lot to consider and overall there’s not much cash anyway if you are talking about what’s in the register then it won’t be much as most registers leave $100 to start that day this can be four $10 bills and four 5 dollar bills and forty singles and as for bank account money businesses usually use this to cover payroll and bills, but what do you get? 

When buying a retail business you focus on 6 things:

1. location of the business

2. gross revenue of the business 

     3.Net income

     4. The businesses inventory 

     5. expenses of the business 

     6. Terms of lease

Pros:

•  Motivates you to make sales on your first day

• Stay on good terms with the old owner rather than arguing over little money 

• You will have a full stock of inventory that’s worth cash

Cons:

• Using your own money to start the day 

• You might have some bills entering your account any day

Example 3: Online business

An online business just like its name is all online, which means business transactions are performed thru a website, and payments can be made via PayPal or Stripe or any other payment gateways, the great thing about owning an online business is everything is visible, usually, you will not the money in the account, you will need to open an account and transfer ACH payments into a new account.

Pros:  

• online businesses generate on a day to day basis

• Online businesses don’t generate cash

• Most likely you would not need any money to start

Cons: 

• Your account will be empty when you start 

• Transferring all payment gateways to your new business account ( ex. Amazon affiliate accounts, google Adsense, and third-party merchants)

• Placing advertising on hold till you generated enough money

Conclusion: So good news some businesses you might be able to take the cash and others you can, so when you do decide to buy a business and the question comes up what happens to the cash? Youll have an idea of what to hear, some of these should help you with your next business, its always best to hire a lawyer to help make the process go as smooth as possible, when you are spending a lot of money to own a business you would expect to get your money worth and yes sometimes the coins in the drawer add up!

Fun fact: Did you know realtors can sell businesses?