Handling Extra Cash and Accounts Receivables under a Stock Purchase
Oftentimes at the sale of the company, there are both extra cash remaining in a company’s bank accounts and outstanding accounts receivables (A/R) due to the company, which are typically not strategic to the buyer’s motives. As such, there are additional considerations to evaluate depending on how the deal is structured.
If the deal is structured as an Asset Purchase, the selling shareholders or members can simply retain both the remaining cash and A/R’s by carving them out of the deal as an excluded asset.
However, there are additional considerations on handling the cash and A/R’s if the deal is structured as a Stock Purchase. One option is to distribute the cash and assign the A/R’s to the shareholders prior to closing. However, the distribution of cash will be taxed as ordinary income (rather than capital gains) to the shareholders.
The other option is to add the amount of cash to the purchase price of the company and have the receipt and collection of A/R’s paid to the shareholders as an Earn-Out. Under this structure, the cash and A/R’s are taxed at a capital gains rate (rather than as ordinary income).