If you want to become an entrepreneur, you have two options: start everything from scratch or buy an already established business. If you choose to go with the second option, you must know that there are several commercial platforms that allow you to buy an established business. These platforms also list businesses in every category so as to make the choice easier for you.
An established business has pending invoices and cash from existing customers. So one big question is, “who keeps the cash?”. Here is some important information on what happens to cash in a business sale.
To understand what happens to cash, you need to know what is included in a business sale.
What Is Included in a Business Sale?
When you are buying a business, you need to find the value of the business and determine if the price you are paying is right. In addition, you may want to know what you will be getting when buying a particular business. For example, you will be getting furniture or vehicles owned by the business and the net income and sales.
When you value the business before purchase, you need to ask the owner if there is any cash around. Then, when preparing the contract, the lawyer should mention everything that will be transferred to the new owner. If the existing owner keeps the cash, the contract needs to mention it. Ensure everything is written clearly on paper, so there are no arguments or court disputes in the later stages.
Though you can have written contracts about cash and other things, it does not apply to all businesses. This is mainly because some businesses have cash lying around from daily activities, while others do not.
So, who keeps the cash? It usually depends on the nature of that specific business.
A distribution business offers a line of credit to its customers. When the customers place a new order, they will pay for the previous order. The line of credit can be a week, a month, or more.
The cycle is repeated, and the distribution business can have thousands of dollars of cash. For example, when you buy a distribution business that has 20 customers, with each customer owing it $3000, it means the business will have around $60,000 cash.
The big question is who keeps the money. Experts mention if you want to continue with the setup, it needs to be stated explicitly in the contract. In this case, the outstanding balance belongs to you, and the customers will pay when they place new orders. Similarly, even if you do not wish to continue with the same terms, that will need to be mentioned in the contract as well.
A retail business will not have any outstanding payments because these businesses deal with cash and credit card transactions, and there is no extension of credit to the customer. Such businesses don’t have much cash around.
An online business receives payment from PayPal, payment gateways, and other payment platforms. Though customers make an online payment for their purchases, you might have to wait for a few days to get the money in your merchant account.
If you are purchasing an online business, you need to first open an ACH account, and the existing owner will transfer all pending transactions to your ACH account. However, the contract should mention the number and value of pending transactions.
Figuring out what happens to the cash is an essential step of the takeover process, but it is not complicated. It can be sorted out easily by mentioning the right terms and conditions applicable while transferring the ownership of the business.