As business brokers know, most small businesses are sold on the condition that the Seller keeps the cash, accounts receivable, and the accounts payable as of the date of sale. As businesses get larger, or if the business has high accounts receivable, then a “deal balance sheet” may be negotiated. In almost all cases the Buyer receives the business name, lease, inventories, good will, customer list, telephone number, yellow page or other advertising, employees, industry knowledge, and so on. The Seller also pays off all debts. This is similar to the Seller paying off the mortgage from the sales proceeds when you sell your home.
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Generally the Buyer needs to receive the assets necessary to create the cash flow he is purchasing.
Machine Shop Owner Loves His Lathes
We worked with a machine shop owner who had eight industrial lathes. He had not used more than two in the past five years but he just loved his lathes! He really only needed to sell two with the business. We suggested that he remove the other six lathes from the shop floor and the equipment list prior to showing the business to prospects. Whatever he was able to earn from the sale of the lathes was money he would not have earned conveying all eight to the new owner.
As businesses become larger these assumptions are subject to negotiation. For larger businesses it makes sense to define the business that will be sold by negotiating a ‘deal balance sheet.’ This shows the approximate value of all assets and liabilities (if any) being sold. For instance, a “deal balance sheet” may specify that current assets are to be $200,000 above current liabilities in order to provide working capital for the buyer.
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