Once you understand the different types of buyers, the next step is identifying which specific buyer is best for your business. The right buyer isn’t just someone who can offer a fair price — they should align with your goals, values, and vision for the company’s future. This week, we will explore how to identify, […]
In the world of mergers and acquisitions (M&A), understanding the nuances of a company’s balance sheet is crucial for both buyers and sellers. One common area of confusion is the treatment of cash in these transactions. This article aims to clarify what happens to cash in an M&A transaction.
A common misconception during M&A negotiations is that the buyer will effectively use the seller’s cash to acquire the company. However, in most cases, the seller retains the cash post-closing, and cash is not included in the purchase price. This exclusion is because buyers generally aim to acquire a business’s operational aspects rather than its existing liquidity.
Typically, the purchase price is adjusted to reflect a cash-free, debt-free basis. This means the seller keeps the cash, and any debt is settled before the sale. The concept of working capital adjustments ensures that the business has enough liquidity to continue operations smoothly post-transaction.
For sellers, understanding this arrangement is crucial. Retaining the cash also means ensuring all outstanding liabilities are settled. This means any debt taken out on the business not paid by the close of the transaction will be deducted from the proceeds at closing. Proper planning and clear communication with advisors are essential to avoid surprises during the closing process.
Tips for Sellers:
- Accurate Financial Reporting: Ensure your balance sheet accurately reflects the company’s financial position, including cash reserves and liabilities.
- Prepare for Working Capital Adjustments: Be ready to negotiate working capital targets and understand how these adjustments impact the final purchase price.
- Clear Communication: Maintain open lines of communication with your advisors and the buyer to ensure alignment on the transaction terms.
Conclusion
Understanding what happens to cash in an M&A transaction is vital for both buyers and sellers. Retaining the cash post-closing can significantly impact the seller’s financial position and the transaction’s overall structure. By providing clear, practical advice, we aim to help business owners navigate these complex transactions smoothly.
If you’re considering an M&A transaction, consult with experienced advisors to ensure you fully understand the terms and are well-prepared for the process. Your financial future depends on it.
About Western
Western specializes in helping closely held or family-owned companies complete a successful sale transaction. This can also include bringing in outside partners or other forms of capital. We seek to help business owners navigate what can often be an emotionally charged, challenging, and confusing process and bring order to it. We are only successful if our clients walk away from the transaction feeling like they did right by their family, company, employees, and legacy.
For more information on how Western helps our clients achieve their maximum potential during the sale process, please visit https://western-companies.com/sell-side-ma/.
Additionally, you can contact Rick Groesch, Western’s Chief Commercial Officer, for a more in-depth and personalized conversation. Rick looks forward to hearing from you and can be reached at either rick@western-companies.com or 817-658-4653.