taxation, are covered by the Seller either out of their existing cash or closing payment. This also means that any excess cash is returned to the Seller as this usually represents profit that has not been extracted yet. However, usually, there is the expectation that a reasonable or minimal amount of working capital (and cash) is left in the business so it can operate under normal conditions.
Excess Cash
Excess working capital generally manifests as excess cash in the business, so this is what most people relate to as it seems intuitive to watch a bank balance grow to more than is required for the business to operate. However, it is necessary to factor in all the requirements for cash in a business, especially outstanding and/or upcoming debts like bank loans and taxes in order to get an accurate picture. For this reason, a proper analysis of ‘working capital’ is necessary. This also needs to take into account seasonality and other time-related aspects of the business cycle.
Excess Working Capital
Generally, excess working capital exists in a business as profits have been accumulated that have not been reinvested, paid off debt, or taken out as a dividend. These accumulated profits are considered excess to operations (not needed for the business to produce the cash flow) and could be removed via dividend prior to a sale without impacting the viability of the business (although this may not be the best method from a tax perspective as below). This means the fixed and net current assets (i.e. debtors, stock, creditors, etc. and a minimum amount of cash) on the balance sheet are what is transferred. Just specifying ‘cash free/debt free’ is generally too simplistic as it does not take into account things like
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