debtors/stock turns and when creditors are due that could require cash in the bank. For example, what would happen if the Seller got all the customers to pay early so that on closing day there were no debtors and just cash in the bank which the Seller would sweep out? The Buyer would be left with creditors but no customer receipts to cover them. Hence the analysis of working capital compressively is more reflective of the nuances of cash flow. This is covered in more detail below.
Tax Considerations
Once an estimate of the Excess Working Capital is calculated, it is technically possible for the Seller to extract this from the business prior to the sale as a dividend without harming the operations of the business. However, this will generally cause a tax event for the Seller with many paying 40%+ in tax on this extraction. Often a more tax-efficient method is to add the excess working capital to the business sale value. This means the Seller is then only taxed at Capital Gains tax rates (usually 10% under £1M and 20% over £1m per person currently in the UK). The effect is that of the Buyer ‘buying the excess cash from the Seller’. (Note: This is just meant to be for discussion, each Buyer/Seller should check their individual situation with their tax advisor).
Long-Term Debts
Generally, long-term debts need to be paid off prior to closing as they were part of the means the Seller used to finance the business. These include things like Bounce Back loans, Funding Circle, bank loans, etc. Often what looks like excess working capital is simply these loans that are still in the bank account so to speak and need to be paid back. If there is not sufficient cash in the business to satisfy these loans,
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