What to do with excess cash before the sale?

Why the question of excess cash arises

Every business needs a certain level of cash to operate: paying suppliers, covering salaries, managing payment delays. This is the operating cash.

Beyond this necessary amount, the available cash is considered excess. It is not essential for day-to-day operations.

During a sale, buyers clearly distinguish between these two types of cash. Excess cash is generally not automatically included in the sale price. It can even complicate negotiations if its management has not been anticipated.

This question must be considered in advance, ideally as part of a tax optimisation strategy several years before the sale.

The three main options for managing excess cash

Faced with excess cash, the seller has three possible strategies:

• Distribute dividends before the sale: withdraw the excess cash from the company as dividends, before the transaction.
• Include the cash in the sale price: leave the cash in the company and integrate it into the valuation negotiated with the buyer.
• Hybrid approach: combine both options with a partial distribution and price adjustment clauses.

Each option has its advantages and disadvantages, particularly in terms of taxation, timing and impact on negotiations. The choice depends on your personal situation, the legal structure of the company and the buyer's expectations.

Option 1: Distribute dividends before the sale

This option consists of withdrawing the excess cash as dividends before signing the sale.

Advantages:

• You control the timing and amount distributed
• Simplicity: the cash is yours before the transaction
• Streamlined balance sheet for the buyer

Disadvantages:

• Potential double taxation: withholding tax (35%, recoverable under conditions) then taxation of the dividend at personal level
• Impact on the balance sheet: may weaken equity

Numerical example (Swiss SA): Distribution of 200,000 CHF in dividends. Withholding tax: 70,000 CHF (recoverable if declared). Cantonal and communal taxation: approximately 15-25% depending on the canton. Net amount retained: approximately 150,000-170,000 CHF.

Option 2: Include the cash in the sale price

Here, you leave the excess cash in the company and include it in the final valuation.

Advantages:

• Single taxation at the time of sale (capital gain for SA/Sàrl, often exempt)
• Simplicity for the buyer: they acquire a company with available cash
• No prior distribution to organise

Disadvantages:

• Negotiation on the valuation of cash: some buyers apply a discount
• Dependence on transaction conditions

This option is often favourable from a tax perspective, especially if the capital gain is exempt. It combines well with standard valuation methods that take into account the company's financial structure.

Option 3: Hybrid approach and price adjustments

The hybrid approach combines both strategies: partial distribution of dividends before the sale, then inclusion of the balance in the price.

It is often accompanied by price adjustment clauses, notably:

• Cash-free, debt-free: the price is adjusted according to the level of cash and debt at the closing date
• Earn-out: part of the price is conditional on future performance (see our guide on earn-out and price supplements)

This option is relevant when:

• The amount of cash is high
• You wish to secure part of the cash before the sale
• The buyer requires a specific level of working capital

Comparative tax calculation: dividends vs inclusion in the price

Let's compare two scenarios for a Swiss SA with 300,000 CHF of excess cash:

Scenario 1: Distribution of dividends before sale

• Gross dividend: 300,000 CHF
• Withholding tax (35%): 105,000 CHF (recoverable)
• Cantonal/communal taxation (20% average): 60,000 CHF
• Net retained: 240,000 CHF

Scenario 2: Inclusion in the sale price

• Cash included: 300,000 CHF
• Capital gain exempt (SA/Sàrl)
• Net retained: 300,000 CHF

In this example, inclusion in the price is more advantageous. But each situation is unique. For a detailed analysis of the applicable taxation, consult our article on taxes on the sale.

What is the right timing to distribute dividends?

If you opt for a pre-sale dividend distribution, timing is crucial.

Too early: You deprive the company of liquidity that could be useful during the negotiation and due diligence period.

Too late: You create a red flag for the buyer, who may see it as an attempt to drain the cash just before the sale.

Optimal timing: Ideally 12 to 18 months before putting the company on the market. This allows you to present clean annual accounts and avoid questions during due diligence.

Coordinate this decision with your tax and legal advisers. The Leez partner network can direct you to experts specialised in pre-sale cash optimisation.

Points of attention and mistakes to avoid

Several pitfalls can compromise your cash management strategy before sale:

• Excessively weakening the balance sheet: Too large a distribution can reduce equity and worry the buyer.
• Creating red flags: Unusual cash movements just before the sale raise questions.
• Ignoring statutory clauses: Some shareholders' agreements limit dividend distributions before a sale.
• Neglecting the impact on working capital: The buyer needs a minimum level of operating cash.

Do not make this decision alone. Consult our article on the 7 common mistakes when selling an SME to avoid missteps.

Special cases according to the type of structure

The management of excess cash varies according to the legal form of the company:

Sole proprietorships and individual businesses: No dividend distribution possible. The cash belongs directly to the owner. Taxation occurs on the liquidation profit at the time of sale.

SA vs Sàrl: Similar mechanisms, but Sàrls sometimes have more flexibility in distributions. Both benefit from capital gain exemption.

Holding structures: Possibility to optimise through inter-company distributions before the sale, with specific tax implications.

Family successions: The logic may differ, with estate and succession considerations. Consult our comparison family succession vs external sale for further details.

Managing excess cash before a sale is a strategic decision that directly impacts your net gain. Distributing dividends allows immediate tax optimisation, but reduces the sale price. Including the cash in the transaction simplifies negotiations, but increases your tax burden. The hybrid approach often offers the best balance between optimisation and attractiveness of the offer.

Three elements determine the best strategy: your personal tax situation, the level of cash necessary for operations, and the expectations of potential buyers. Advance planning, ideally 12 to 24 months before the sale, gives you the necessary room to manoeuvre to optimise this dimension without rushing.

Before making any decision, assess the real value of your business. This will allow you to simulate different scenarios and choose the most advantageous option. Estimate your business for free on Leez and access our network of tax and legal experts for personalised support.