What should I do with my company's cash reserves when selling it?

Before organizing the sale of a business, managing cash reserves that exceed debt is a crucial aspect not to be overlooked.

This article provides a summary of the options to consider for optimizing your cash reserves.

Effective Use of Cash Reserves in a Sale Transaction

Before organizing the sale of your business, managing cash reserves that exceed debt is a crucial aspect not to be overlooked.

This article provides a summary of the options to consider for optimizing your cash reserves.

Positive Net Cash (Cash Available Greater than Bank Debt)

Positive net cash, exceeding working capital requirements (WCR), must be paid by your buyer. It can be subject to adjustments and negotiations.

To define the amount of this cash reserve, consider the following steps:

A. Define Net Cash Exceeding WCR

Calculate the WCR:

Identify Key Components: WCR is determined by the differences between current assets and liabilities, including inventories, accounts receivable, and accounts payable.
Calculation Formula: WCR = Inventories + Accounts Receivable – Accounts Payable.
Analyze Operating Cycles: Understand the cycles to estimate the turnover period for inventories and the collection of receivables.

Determine Available Cash:

Cash Balance: Identify the total amount of liquid assets available (cash, term accounts, marketable securities, etc.).
Necessary Reductions: Subtract short-term commitments and bank debts to obtain net available cash.

Calculate Net Cash Exceeding WCR:

Calculation Formula: Net Cash Exceeding WCR = Available Cash – WCR.

B. Determine Possible Uses for Net Cash

With a clearly defined net cash exceeding WCR, several options are available:

Pre-Sale Dividend Distribution: Distribute a portion of the cash as dividends to existing shareholders before the sale, which can reduce the taxable base for the buyer.
Debt Repayment: Reduce liabilities before the sale to make the business more attractive and simplify the transition for the buyer.
Repayment of Shareholders’ Current Accounts (CCA): Prevent post-sale complications by including clear provisions regarding CCA in the sale contract.
Retain Cash in the Company: Buying a business with cash can increase potential buyers’ interest, as it secures the company’s takeover and future operations.

C. Optimize Taxation Related to Your Cash Reserves

Once net cash exceeding WCR and its uses are defined, identify scenarios to minimize the tax burden on excess cash:

Spread Capital Gains: Carefully evaluate the taxation associated with dividend distribution versus capital gains from the sale. If capital gains are less taxed, it may be wise to leave the cash in the business.
Reduce Tax on Capital Gains: A cash outflow before the sale can reduce the taxable base of the capital gain but may increase the overall tax burden.
Consult with a Tax Specialist: Many arrangements can be implemented before the sale to optimize taxation, especially related to cash reserves (150-0 B TER, Dutreil Pact, etc.). We work with excellent tax specialists to help you model the best choices.

In a nutshell:

Decisions related to managing excess cash reserves should be discussed before the sale to identify actionable options and reduce the tax burden associated with your transaction. It is advisable to seek advice to help you visualize scenarios for optimizing your cash reserves and net valuation after taxes.

Indeed, your cash reserves are purchased at face value by your buyer, whereas your business is purchased at a multiple of EBITDA. Therefore, it might be advantageous to invest your cash reserves to generate more EBITDA, thereby optimizing the valuation of your business (and your cash reserves).