When you receive an offer for your business, what you see is not always what you get…as there are fees associated with every business transaction that you may not be taking into consideration.
For example, if you sell your business for $1 million dollars, it is likely that you won’t be taking home $1 million dollars. Where does the money go? The 3 big ones:
- Professional fees (accountants, lawyers, DealBuilder, etc.)
- Working Capital for the buyer
There are also scenarios of debt and improvements that would have to be rectified in the deal. It is easiest to think of this in terms of a house sale. When selling your home, you would not expect the buyer to pay your mortgage in addition to the sales price - as that is your responsibility. In a similar fashion, when you sell your business, the buyer expects you to pay out any long-term debts.
While this seems like a lot of money leaving your pockets after a successful deal, the story is not all sad. In some cases, there are additional monies available to you, but this depends on what items listed on your balance sheet are included in the sale of your business. Some of these items become the responsibility of the buyer (for example collecting outstanding client payments “accounts receivable”) while others are your responsibility (paying any outstanding payments to suppliers “accounts payable”). The difference between what you are responsible for and what the buyer is responsible for is referred to as working capital.
Understanding working capital is essential to any successful business transaction and is something you should discuss with your accountant before selling your business. Because if you have a large working capital requirement (let’s say $200,000), the owner in our original example would only walk away with $800,000 cash from a sale of $1 million. This is a significant amount of money.
On the flip-side, sometimes the buyer can actually owe you more money at closing. In this case, let’s say you received an additional $100,000 from the sale - this may have further tax implications you haven’t considered. Again, this underlines the importance of speaking about working capital with your accountant.
Your Deal Manager can help with these calculations so that you are ready to go to your accountant with a full understanding for what you will need help with.
When you’re working with your Deal Manager, ask the questions, they are there to help you.