Who Gets the Money When a Company is Sold? (2024)

When a company is sold, the process involves a series of complex financial transactions and negotiations. Depending on the structure of the sale, the proceeds might be distributed among different stakeholders, including shareholders, employees, and even creditors. Understanding how these funds are allocated can provide valuable insights for investors, employees, and business owners looking to sell their businesses.

One of the key aspects to consider during the sale of a company is the allocation of its assets and liabilities. This will directly impact the new company itself’s valuation and how much money is left for distribution to various stakeholders. In addition, the corporate structure and changes that might be implemented post-sale can also have an effect on the financial aspects of the deal and the eventual payouts. Among these stakeholders, shareholders usually receive the highest priority, as they hold equity in the business, directly benefiting from any increase in the company’s value.

Key Takeaways

• The money from the sale of a company is distributed among various stakeholders, including shareholders, employees, and creditors.
• Assets and liabilities, as well as the corporate structure and changes, impact the valuation and payouts of the company when it is sold.
• Shareholders, holding equity in the business, usually receive the highest priority in payouts from the sale of a company.

The Selling Process

Valuation of a Company

The first step in selling a company is determining its value. This includes assessing its tangible and intangible assets, such as cash, inventory, equipment, property, and intellectual property. The valuation process is crucial to ensure that the seller gets the best return on their investment. Professional financial advisors or contract lawyers with experience in business valuation can help with this process.

Identifying Buyers

Once the company’s value has been established, the next step is finding potential buyers. This may include competitors existing shareholders, strategic partners, or financial buyers such as private equity firms. Networking, marketing materials, and online listings are common methods of attracting potential buyers.

Negotiation and Contract

When a potential buyer has been identified, negotiations on price and terms begin. The seller should be prepared to defend the valuation of the target company to ensure they receive the best price possible. Both parties should engage experienced legal representatives to review or draft the necessary agreements, such as the sale of a business agreement. These contracts formalise the terms of the sale, distribution of money, and help to protect the interests of both parties.

Throughout the selling process, maintaining a clear understanding of each party’s expectations and responsibilities is essential. By communicating effectively and utilising professional services, sellers can ensure they receive the best outcome for their investment.

Shareholders and Payouts

Distribution of Payouts

When the target company is sold, shareholders are usually entitled to receive some form of payout. This can come in the form of cash, shares in the acquiring company, or a combination of both. The specific distribution method and amount depends on the agreement reached between the buyers and sellers during the acquisition process. In a cash sale, the buyer will buy the shares at the proposed price, and the shares will disappear from the owner’s portfolio, replaced with the monetary equivalent in cash.

Taxes and Fees

It is important to note that shareholders may also be subject to taxes and fees when a company is sold. Capital gains tax may apply to the profits realised from the sale of shares, and this tax rate will vary depending on the individual’s tax bracket and the length of time the investor’ shares were held. Additionally, there may be transaction fees associated with the sale, such as brokerage commission or transfer fees.

In summary, when a company is sold, shareholders are typically entitled to some form of payout, whether it be cash, shares in the acquiring company, or a combination of both. The distribution method and amount are determined by the agreement between buyers and sellers during the acquisition process. However, shareholders should be aware of potential taxes and fees that may be applicable to their profits.

Assets and Liabilities

Asset Sales

When a company is sold, the buyer acquires its assets, which can include cash, accounts receivable, inventory, equipment, property, and leasehold interests. The acquisition of assets happens through an asset sale transaction. An asset sale is a transfer of selective assets and liabilities between the buyer and the seller. In other words, some assets and liabilities may be transferred, while others may not be. The combination of the two may vary and are subject to negotiation.

The owners and other stakeholders like employees, customers, and suppliers may also be affected by the sale of a company. Depending on the terms of the sale, the buyer may continue to utilise these stakeholders, integrate existing products and services into their portfolio, and leverage the resources and intellectual property of the target company.

Handling of Debt

When a company is sold, its debt may be handled differently depending on the type of transaction. In a share sale, the buyer becomes the indirect owner of all the assets and liabilities. The debt will continue to be the seller’s obligation after the closing.

In contrast, an asset sale involves the transfer of assets and liabilities without transferring the ownership of the entire company. In this case, the buyer may choose to take on a portion of the seller’s liabilities and debts, negotiate new terms, or exclude them from the transaction.

Handling of debt in an acquisition is also subject to negotiation. For example, when a company acquires a certain percentage of the target company’s assets, it may take on a corresponding amount of liabilities. Contracts and agreements also play an important role in determining the distribution of acquired debt. Contract review services can be instrumental in ensuring contracts are clear and inclusive of all necessary stipulations and agreements regarding debt distribution.

To sum up, the handling of assets and liabilities, including debt, during the sale of a company depends on the type of transaction, the negotiation between the buyer and the seller, and the stipulations in contracts and agreements.

Financial Aspects

Income and Revenue

When a business is sold by an asset acquisition, the financial aspects of the transaction play a crucial role in determining who gets the money. The income and revenue generated by the company up to the point of sale usually remain with the initial owner. This includes money in bank accounts, petty cash, and cash equivalents such as bonds. The buyer will typically take over the revenue streams and income generated by the company after the transition is completed.

It is worth noting that in larger business sales, working capital might be included as part of cash buyout part of the deal. Working capital usually covers the necessary cash and accounts receivables to pay the business’s outstanding expenses. In such cases, a portion or all of the company’s funds may be passed on to the new owner.

Balance Sheet Remodelling

The sale of a company often involves a balance sheet remodelling process. This is a key aspect in determining the financial implications of the transaction for both parties. The seller’s balance sheet will undergo significant changes as they remove assets, liabilities, and equity related to the sold business.

On the other hand, the buyer or acquiring company’s balance sheet will need to account for the newly-acquired company, integrating its assets, liabilities, and equity into their financial statements. This process can involve:

• Reclassifying assets and liabilities, e.g. property, inventory, and accounts payable
• Adjusting the values of certain items to reflect their fair market value at the time of the sale
• Recording goodwill or other intangible assets relating to the acquired company
• Allocating the purchase price to acquired assets and liabilities

Ultimately, the distribution of funds following a company sale depends on the underlying agreement and structure of the deal. Money may change hands in various ways, such as all cash, new shares, a mix of cash and shares, or an entirely share-based transaction. The agreed-upon terms will determine how ownership of bank accounts, property, and cash equivalents will be transferred during this significant business transition.

Corporate Structure and Changes

Publicly Traded Company

When a company is sold, the acquisition process involves various entities, including the buyer, founder, IPO, shareholders, networks, and competitors. For a public company, the shareholders receive compensation based on the agreed-upon sale price (often determined by the stock price or share price on the stock exchange), which can be an all cash deal, shares plus cash, or all shares in the acquiring company. The result of the company sale would depend on the terms negotiated between the buyer and the seller.

Operations

During the acquisition, the operations of the company might undergo significant changes. The buyer might implement new strategies or restructure the business to align with their goals better. The founder often remains involved after the sale due to their leadership capabilities and knowledge of the business. Working capital, which includes cash and accounts receivables necessary to pay the business’s bills, may also be included in the sale, especially for businesses valued at over £5 million.

Competitors

Competitors in the industry play a crucial role during the acquisition process as well. The sale of a company can create opportunities for other competitors to capitalise on possible disruptions in the company’s services or products during the transition period. Furthermore, the acquisition might lead to a change in the competitive landscape if the buyer is also a company in the same industry, resulting in an enhanced market share or a broader product portfolio.

Management and People

Founder and Key People Roles

When a company is sold, the distribution of money from the sale often depends on the roles and agreements made with the founder, key people, and shareholders. In most cases, founders who are also significant shareholders receive a substantial amount from the sale, while key people such as executives may receive bonuses or other financial incentives based on the sell’s value. For example, a company might be valued at £20 million, and the key executive agrees to receive 5% of the sale price exceeding £20 million, paid six months after completion. It is essential for the involved parties to have clear agreements about the allocation of funds from the sale.

New Owners and Opportunities

The acquisition of a company often entails new opportunities for the involved parties, as well as some uncertainty. The new owners typically have a vision for the acquired company, and this might involve significant changes to the management structure, company direction, and other adjustments that may impact employees and stakeholders.

When an acquisition takes place in private firm, employees might experience a range of outcomes—some may be offered new opportunities within the purchasing company, while others might face redundancy. The uncertainty that comes with an acquisition can be unsettling for employees, but the overall result might offer new avenues for personal and professional growth.

In the end, when a company is sold, the distribution of the proceeds will vary depending on individual roles, agreements, and the new owners’ plans. It is vital for all parties involved to communicate effectively and navigate the transition with the best interest of the company and its people in mind.

Frequently Asked Questions

Do shareholders receive payment during a company sale?

Yes, shareholders typically receive payment during a company sale. The agreed sale price is usually a combination of cash, shares in the acquiring company, or both, and every shareholder gets their portion according to their stake in the company.

What do employees get when their company is sold?

Employees’ benefits during a company sale depend on the terms of the sale, their employment contracts, and the new employer’s policies. They may receive severance pay, have their contracts transferred, or be offered new terms of employment. However, there is no standard rule, and each situation is unique.

What happens to the company’s cash during a sale?

The fate of a company’s cash during a sale depends on the terms of the sale agreement or contract. It could be retained by the seller, used to pay off liabilities, or incorporated into the purchase price. The specifics are determined on a case-by-case basis.

How are company debts handled in a sale?

In a company sale, debts are usually handled by either transferring them to the buyer or settling them before the sale. This depends on the sale agreement and the parties involved. Debts can sometimes impact the sale price of the company or the way it is structured.

What is the process of distributing money after a company is sold?

The distribution of money after a company sale typically involves paying shareholders, settling outstanding liabilities, and addressing any remaining business expenses. Shareholders receive their share of the sale proceeds based on their stake in the company. The process may also include paying any taxes or legal fees incurred during the sale process.

Are stakeholders involved when a company is sold?

Stakeholders, such as employees, suppliers, and customers, can be impacted when a company is sold. Their involvement depends on the sale’s terms and the buyer’s intentions for the company. It is common for stakeholders to be informed of the sale and any potential changes that may affect them. However, their say in the sale process usually depends on their role and relationship with the company.

Find out more!

If you want to read more in this subject area, you might find some of our other blogs interesting:

• Step-by-Step Guide on How to Transfer Shares to a Holding Company
• Breach of Settlement Agreement: Consequences and Remedies Explained
• Who Gets the Money When a Company is Sold?
• What is a Counter Offer in Contract Law? Explained Simply and Clearly
• Understanding the Costs: How Much Do Injunctions Cost in the UK?

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This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should consult with appropriate professionals before selling a business. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person selling a business.