My business is worth $4M. What will I net at close?
As soon as we value a business, an owner will naturally ask what they can expect to net at close. After all, it’s the net that matters.
This post will address frequent questions about the treatment of cash, inventory, outstanding debt / liabilities, receivables & payables, and transaction costs.
For this post, we will assume you know what your business will transact at AND the type of sale (asset vs stock sale). In other words, you have a verified offer, executed a Purchase & Sale Agreement, or have had a credible valuation within the last 12 months (online calculators do not count!).
Not sure what type of sale (asset vs stock sale) is normal? Watch this 90-second video breaking it down: Selling a Business Video Resources | Washington Business Brokers.
Are you an owner / future seller? Check out our 2025 Seller Guide for what to expect
Are you a prospective buyer? Do not miss Straight Talk for Buyers
Cash
This is a great place to start….because…a seller keeps it. The logic is straightforward – cash is retained by the seller because it was earned it from operating the business. An important caveat – this statement assumes an asset sale.
Equipment or Vehicle Loans
Does your business have equipment or vehicle loans? These will be paid off at close. All equipment and vehicles used by the business must generally be transferred free and clear of debt. There are exceptions, but they are rare.
We often help trades owners sell their business. In the last year we helped transact a Bellingham plumbing business, a Lynnwood landscaping business, a Shoreline tree care business, and we are prepping an Eastside roofing business for sale at the moment. Trades (service) businesses like this nearly all have a number of pricey vehicles. The business may own 16 vehicles outright and be making bank payments on two or three additional vehicles. In this example, any outstanding loans on the two or three newest vehicles would be paid off at close, usually via escrow. Sometimes a seller will pay off a vehicle loan before escrow, this is fine too.
Inventory Treatment
What about inventory? Is it included or excluded from the transaction price? This really depends on the value of the inventory relative to the transaction price and the saleability / inventory turns in a given industry. When we value a business, we look at inventory levels across the last several years and any seasonality.
When we negotiate the value of inventory with a seller and buyer, we will look at the age of inventory and often assign a discount factor. For example, if your inventory, at cost, is $100,000 we may ask a buyer to pay you $94,000 or $95,000 at close for this inventory. The discount factor allows a sale to move forward and helps us avoid a situation where a seller and buyer are opening / inspecting (and arguing about) every piece of inventory before close.
The age of inventory plays a big part. In general, buyers will be open to paying for inventory less than 12 months old. It is much more difficult for buyers to get comfortable with paying a seller for inventory that has been sitting around longer than this.
In some sales, we have used a consignment approach. Meaning that after a sale closes, the buyer will pay the seller the cost for any inventory in stock at close that is sold within X months after a sale. This helps a buyer with working capital and reduces the amount of external financing they need to obtain to close.
Often, we look at what is a typical level of inventory and use this as a target or peg at close. Recently in the sale of a Redmond auto repair shop we used this approach. The seller and buyer agreed to a target inventory value of $82,000 to be included at close. If the inventory value at close was higher than this, the buyer would pay the seller for the difference. Similarly, if the inventory value was lower than this, the seller would credit the buyer. We used this approach last year with the sale of a Wenatchee medical spa, in that case the business used pricey vials / units of cosmetic products.
Receivables, Payables, Accrued Vacation, EIDL Loans, & Gift Cards
In an asset sale, the seller is going to retain all Accounts Receivable. Meaning, the seller gets to collect all outstanding A/R at close. Similarly, the seller has to pay all outstanding Accounts Payable at close.
There are often a number of other assets and other liabilities. Examples include prepaid deposits with a landlord or utilities, bonds, deferred tax assets and liabilities, and business credit cards. The same logic for A/R and A/P applies here.
Accrued vacation is not something that first comes to mind with sellers and buyers. That said, it is customary for a buyer to assume (honor) accrued vacation instead of it being paid out, regardless of an asset vs stock sale. The logic here is that paying out would make employees more likely to leave in the short term and create potentially awkward dynamics for the buyer as they establish a new vacation policy.
Finally, we have owners who received large EIDL (Economic Injury Disaster Loans) loans during Covid wonder how these are treated. Many owners mistakenly believe that these can be transferred in a sale. This used to be the case. Rest assured, they can NOT be assumed by a buyer and must be paid off at closing. Note this applies to other industry specific Covid loans, including state specific Covid-related loans that we have seen Washington, Oregon, and Alaska business owners receive in agriculture, food & beverage (RRF loans) and manufacturing.
Gift cards have many of the same treatment considerations as Inventory. What is the normal balance? What is the age of gift cards outstanding? How many go unredeemed? Depending on the answers to these questions, a case can be made for a seller to credit a substantial amount to the buyer in escrow.
Let’s consider three examples. We helped the owners of a well-known dog daycare in Ballard sell their business during Covid. The owners offered a discount 5-day punch card to customers at a discounted daily rate. Nearly all customers took advantage of this, resulting in a sizable, $150k gift card liability on the Balance Sheet. Because these were redeemed almost immediately, this amount was credited in full at escrow. Next, we helped a fish & seafood market at Fishermen’s Terminal sell a few years ago. In their case, they had excellent records of past gift cards outstanding…some dated as long as 20 years ago. The redemption rate on these was very, very low. The seller agreed to credit the buyer 100% for any gift cards that were less than 24 months old. Finally, we helped the owners of a popular skydiving operation in Snohomish sell earlier this year. The gift card balance was sizable, that said, many of the gift cards went unredeemed. Because the seller had meticulous records of low redemption rates we were able to negotiate a smaller credit to the buyer.
Transaction Costs
Transaction costs in a business sale include your M&A Advisor / Business Broker, attorney, CPA, and escrow.
- M&A Advisor / Business Broker fee
M&A Advisors / Business Brokers, like us, work on a success fee, commonly called a commission. The fee % in a business sale scales up or down depending on the transaction size. Expect this fee to range from 4% – 12% of the transaction price, with a larger % on smaller deals. We use a standard fee structure on transactions up to $5M, with three fee cut points. This is a helpful article on fee structure and what to expect:
https://www.bizbuysell.com/learning-center/article/business-broker-fees
If we value your business above $5M, we custom quote a fee depending on the complexity of the business and industry.
There are variations in fee structure that become more common as you get above $5M, $10M and $50M in transaction value. This is an in-depth article on deal fees for larger transactions from a widely respected platform, Axial:
2. Attorney
Legal costs generally range from 0.5% – 2.0% of a transaction. In a $3M trades business, this suggests a range of $15k – $60k. We advise sellers to be organized and detailed when working with their attorney. Be in front of your computer, looking at the same legal document, when you get on a call or Zoom. You cannot look at a legal agreement on an iPhone! We see sellers burn 10 minutes of a Zoom pulling up the right version of a document as they search their email. That can be an expensive 10 minutes.
Keep in mind your M&A Advisor / Broker can answer many common questions about deal norms and various paperwork, agreements, and forms that are completed as part of a business sale. In addition, escrow is a great resource on technical questions too. Both escrow and your M&A Advisor are not charging you in 6 minute increments 🙂
A mistake we see sellers make is asking basic legal questions that they easily could ask their Advisor, or even Google. Another mistake we see is when sellers are disorganized and/or cannot answer questions about the business or business records. This chews up time for an attorney, and their fee tends to reflect it. We help sellers with preparation and have lots of experience knowing what documents attorneys will need to “paper” your deal.
3. CPA / accounting
Good news here! CPA costs are generally minimal in a business sale. Your CPA may bill you for a couple hours of time, often there are no CPA costs that we see a seller pay in a business sale.
4. Escrow
Escrow costs are minimal and flex up or down depending on transaction size. These can be as low as $2,500 for a small transaction to $10k for a $4M trades business. It is customary for seller and buyer to split escrow fees equally.
Taxes
Our next post will cover core tax questions in a business sale.
Settlement Statement
While a seller and buyer are completing final paperwork, one of the most important documents they will receive for review is a draft settlement statement from escrow. These naturally look different for seller and buyer.
For a seller, the settlement statement will include the final transaction price, along with any transaction costs or payments that are due at close. If a seller has outstanding vehicle or equipment loans, the payoff amounts will be detailed here. Beyond this, any commercial loans that the seller owes will be due at closing, so expect to see these listed on the settlement statement.
A seller may see some small amount of a county or city recording tax. They will NOT see any capital gains or income tax on a settlement statement, as these are paid by the owner(s) on their personal filings.
A buyer’s settlement statement will look different. It will include their capital injection (down payment), credit for any earnest money deposit previously made to escrow, and lender contribution of funds. Beyond this, there will be sales tax due on vehicles and equipment, as well as potentially some small amount of a county or city recording tax.
Summary
As you are probably beginning to appreciate, there are few plain vanilla business sales.
Every “net to you” calculation starts with the transaction price AND type of sale (asset vs stock).
Then, we methodically work through each of the items above. Working capital, inventory, A/P, A/R, cash on hand, transaction costs, and any taxes due at close.
We have successfully advised dozens of sellers and buyers through the sale process and will of course address any and all unique transition components with your business sale.
As always, thank you for reading.
At Washington Business Brokers we are experts in valuation, optimizing a business for sale, buyer identification and qualification, negotiation, deal structuring, and closing.
If you would like to better understand the value of your business or learn more about the process of confidentially selling:
call or text 206.703.3555
email info@wabusinessbrokers.com
or schedule time for an exploratory, free consult
100% confidential, always.
We proudly represent businesses with revenue of $2M – $30M across many industries. While most businesses are in the Pacific Northwest, we work with owners across the country. Ideal prospective sellers have 10+ full-time employees and $2M+ in sales.
You are an expert on your business.
We are experts on the process of selling a business.
When the time is right for you, we will be proud to partner and advise on your fair deal.
