Seller giving cash at close?

April 10, 2021

by a searcher in Boulder, CO, USA

Interesting deal I’m working on where the seller is including $250k cash back in the business to help fund on going working capital. . If we don’t need the cash then we can reduce our offer by that same cash amount. Have you seen anything like this? I’m valuing the company based off normal EBITDA multiples and then adding back the cash on top as I still end up needing to get that cash (plus more) all financed as part of the deal.

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

The structure you are looking at with working capital built in could have been structured that way based on the advice of a lender they are working with. The SBA will typically allow working capital to be built into the deal, and Banks are very focused on being sure there is always enough working capital in each transaction. From my perspective the questions you should be asking are first: 1) how much working capital do I need; and 2) do I need most of the working capital on a short-term or a long-term basis. There are some good cash flow models you can use to determine what type of working capital you need. Most lenders will make you complete one or they will be doing one internally to verify that you have enough working capital post closing. Once you know how much you need, I usually recommend rolling the portion you need long-term (more permanent working capital to operate with) into the initial SBA term loan, that way you are amortizing that debt based on the ten year amortization that loan offers. Anything you think you will need short-term or would revolve I would put into an express line of credit. The express line typically has a 3 or 5 year initial revolving term, and then the remainder gets amortized out over 7 or 10 years. So if you know some working capital will be more permanent up front, I usually recommend locking that piece into the initial ten year amortization. Please keep in mind often times there are limits to the amount of working capital a lender will build into the deal. If you would like to discuss options and structures we have seen and worked with before, I am more than happy to do so at anytime. You can reach me at redacted

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

I have seen many deals fall apart b/c of lack of clarity on inclusion/exclusion of WC, Further when one says seller is including or giving "cash", the risk of misunderstanding magnifies and deal falls apart at the end. Or buyer/seller wind up doing uncomfortable compromise. There is no way a seller gives "cash" at closing because "cash" does not transfer from seller to buyer at closing (there are some exceptions).
All my transactions include WC with no exception. Let me give example. This works for Asset or Stock deal.
Price $3 M including Target WC of $600 k. P to be adjusted up/down for changes in WC at closing.
Target WC is calculated and agreed by both sides. Assume it is as follows:
Target WC (600) = Cash (50) + A/R(300)+Inventory###-###-#### A/P###-###-#### Typically there is no cash in Target WC but I am including here to show how inclusion of cash is handled in a transaction..
Now assume buyer's hypothetical sources of capital will look like this
Sources = Equity(600) + SBA(1700) + WC revolver (300) + Seller Note(400).
At closing, Seller keeps cash (or whatever it is on seller's balance sheet). Assume other WC pieces have not changed. So seller is giving WC of $550, which is $50 less than Target WC of $600. So buyer has to deliver $2950, not $3000,
Buyer capital sourcing remains $3000 but only delivers $2950 to seller. Buyer keeps the $50 left over. So, buyer's opening balance sheet will have cash(50), A/R(300), Inventory (400), A/P(150), Revolver (300), SBA###-###-#### and Equity (600).

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