The short version
- Most small deals are asset sales, where the buyer takes assets and goodwill.
- Cash free debt free means you pay off business debt at closing and keep the cash.
- Lenders may want working capital left in the business.
- Settle which vehicles and personal items go, and which stay, before you sign.
Asset sale basics
More than nine in ten small deals are asset sales. The buyer takes the equipment, name, customer list and goodwill, and you keep the company shell, its cash and receivables for completed work.
Your attorney and CPA can confirm whether your deal is an asset sale or a sale of shares or membership interest. It changes taxes and filings.
What the phrase usually means
In a cash free debt free deal, you pay off business loans and liens from the sale proceeds, and the buyer starts without your debts. You keep the cash in the business.
Taxes, broker fees and attorney fees also come out of the proceeds, so plan around your net amount, not the headline price.
Working capital
A lender may want some cash left in the business, so the buyer can cover the first weeks. If the buyer funds it instead, it raises the effective price, and they may ask you to reduce it.
Settle how working capital is measured, and what happens if it ends up higher or lower than expected on closing day.
The tax side
How the price is split among equipment, inventory, a noncompete and goodwill changes what you owe, since categories are taxed differently. Both sides file a form with the IRS showing the split, and the filings must match.
Selling equipment for more than its book value can trigger depreciation recapture. Have your CPA model the split before the letter of intent, and settle it in writing before you sign.
Inventory and equipment
Inventory is often counted just before closing and priced separately. Buyers may pay for a hard count. Heavy inventory compared with earnings can also make bank financing harder.
Equipment loans must be paid off or assumed, and the lender holds the title until then. Read titling vehicles in a Texas sale for the vehicle steps.
Items that are not the business
- Personal vehicles and toys kept on company books
- Family members on the payroll
- Personal loans to or from the company
- Real estate owned by you, not the company
Include only what affects revenue, and settle the rest early. See also selling the building or staying on as landlord, and request a private price range.