All too often, owners sell their businesses with the equivalent of cash hidden in the desk in the form of excess working capital or non-essential assets on the balance sheet. Unfortunately, the buyers don’t tend to be as generous and return the cash. Compounding the situation, this excess working capital may be supported by short-term debt which, in most situations, will need to be paid off by the seller.
Last minute changes between the date of the letter of intent and the closing of the transaction could result in a working capital adjustment, therefore it is important to right-size the balance sheet before beginning the sale process.
How can you make sure that the desk is emptied out before the sale?
Manage your accounts receivable – It’s common that a company will have a certain amount of trade receivables that are extended beyond the normal terms. If still collectable, these receivables represent excess cash that will accrue to the buyer if receivables are part of the acquisition. In preparation of a sale, you must work to collect as many of these slow-paying receivables as possible and work to keep current sales collectable within your normal credit terms.
Be disciplined about inventory – If a business carries inventory, have as little as possible going into a sale. Try to let the buyer purchase as much of the raw materials and/or produce the finished goods for sales that take place after closing.
Machinery and equipment – It’s fairly common for manufacturers to own equipment that is no longer being used to produce inventory. If the equipment has a ready market, go ahead and sell it before the company is sold. If the equipment is obsolete, it may have significant scrap value.
Take advantage of trade credit – Your vendors love you for paying in two weeks, but their credit terms likely give you four. Extending your total payable portfolio will increase the amount of cash on hand that you will keep in a sale.
Learn more cash tips for your business in Lloyd's post, Advice for First Time Buyers