Excess cash in company prior to close

searcher profile

May 15, 2024

by a searcher in Chicago, IL, USA

I'm negotiating an LOI with a Wholesaling company and they have excess cash in the bank beyond the 3 months working capital required.

I'm wondering how this cash is treated in the transaction, specifically does it reduce the amount I pay to the seller at close? For example if I'm paying the seller $2m and there is $200k excess working capital, doss the seller take home the $200k and I give the seller $1.8m at close?

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commentor profile
Reply by an intermediary
from Boston College in Mansfield, MA, USA
Every deal I've ever done was cash free/debt free. Owner keeps all the cash and pays off all outstanding debt. A normalized w/c amount is left in the business and is adjusted at close and/or post closing adjusment date.. Working capital in all the deals I've done have excluded cash. If the for convenience a buyer requests that cash be left in the business (usually because the can't get a w/c facility in place or a banking relationship in place or to cover the next payroll or scheduled payments in the next week) it is a dollar for dollar increase the purchase price.
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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
1. I do not know what you mean by 3 months of WC. Why should a seller give that to buyer? That amount could be more than the price.
2. Typically, WC is AR, Inventory and AP. But there many, many more line items.
3. There are times when cash is added to #2 above. For example, you are closing on 30th and payroll is due on Friday 2 days later.
4. Excess Cash (if Closing WC = WC PEG): In your example, in Asset purchase, seller will keep $200 k of Excess Cash and you will pay $2 M. In Stock Purchase, it is usually difficult for seller to pull out $200 k, So, you will keep the $200 k cash and give the seller $1.8 M.
5. If Closing WC is different than WC PEG (Difference is X), then payment is #4 above will change by X. Keep in mind it is IMPOSSIBLE to know what Closing WC on the day of Closing. There is post-closing true-up.
Happy to help. I can go 10 more layers deep on this subject. I have solved disputes in transaction involving Big 4 accounting firms.
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