Key takeaways for “Is Cash An Asset In The Sale of A Business?”:
- Cash is deemed to include any petty cash on hand and funds in the company’s bank accounts
- The sale of a business is treated as income and you must pay taxes on it
- A general rule of thumb says that your company should have three to six months’ worth of operating expenses in cash at any point in time
Is Cash An Asset In The Sale of A Business?
When a business owner is contemplating selling their business, one question at the top of the list is, what is being sold?
What you are selling, or being included in the sale price, depends on which industry your business falls into, and how the business will be marketed. There are, of course, certain items that are generally included in any business sale.
Primarily, the seller is usually selling the assets of the business, not the commercial concern. The main reason for this is to avoid any liability, by the buyer, for previous actions by the seller before the sale.
So, what assets are included in the sale of a business?
All furniture, fixtures, and equipment used in the normal course of business are generally included in the business sale price. Any personal assets that are owned by the business, but not essential, for the day-to-day running of the business, are usually excluded from assets being sold. The seller should not include any of these assets in any documentation and explain in simple terms to the buyer what is and what is not included in the sale of the business.
What happens to cash in a business transaction?
Is cash an asset of the business when considering the sale? The simple answer is NO. The business owner retains any and all cash or cash equivalents, such as bonds or any money market funds. Cash is deemed to include any petty cash on hand and funds in the company’s bank accounts.
The main reason for not treating cash as an asset in the sale of a business is due to the fact that both parties agree on a figure for the net working capital, rather than on how each part of working capital will be treated in the sale. A company’s net working capital is normally defined as current assets, with cash and their equivalents being excluded, less current liabilities, excluding any term loans.
Any accounts receivable, which is an asset of the business, can be included in the business sale, although the value is not usually incorporated in the sale price. It is generally considered advantageous to both parties if the buyer buys the receivables, making for a smoother transition for the customers and releases the seller from pursuing any delinquent accounts after the closing
What tax implications should be taken into account when selling a business?
When an owner is selling their business, income taxes that will have to be paid after the sale must be a consideration. As with any transaction that generates money, the sale of a business is treated as income and you must pay taxes on it. This income or cash received, is more often than not, classed as capital gains and applies equally to the sale of company assets or shares in a company’s stock.
However, if you sell the assets of a Limited Liability Company (LLC) and the sale generates a profit then, because the IRS considers sole proprietorship’s and limited liability companies to be disregarded entities, any profit will not be taxed separately but paid via the owner’s personal tax return, and since you do not treat cash an asset of the business, you retain all the cash the business has generated up to the point of the sale.
When selling a business you should think about structuring the sale so that you can take advantage of any tax savings relating to cash received. You may want to keep the accounts receivables so that you only pay tax on the income after it is received, not at the time of the sale.
Cash is king!
That phrase has been around for decades. But what does it mean?
It identifies the amount of adequate cash for short-term operations, investments, and acquisitions as an asset within the company. A business could have large amounts of accounts receivable on its balance sheet which would raise equity, but the company could still be short of cash to make purchases, including paying wages to staff employees.
How much cash should a company keep on hand?
There is no “ideal number” that can begin to explain the exact sum of money the business must have at any given point in time. Many variables have to be taken into consideration, but the general rule of thumb says that your company should have three to six months’ worth of operating expenses in cash at any point in time. If you lose a major customer, for example, and your income drops significantly, having a six-month buffer will give you time to make necessary adjustments to your cash flow.
The amount of cash that is right for your organization may depend on a number of factors. Although many companies use the three to six-month rule on operating expenses as a rough guide, you ought to take a close look at your expenditure and make any necessary adjustments.
If you have any questions about selling a business, please feel free to contact us.