Legal Blog

M & A Nuggets: Prevent The Cash Drain

CashPast M & A nuggets have talked about whether a business purchase should be structured as an asset purchase or a stock purchase.  Sometimes the transaction must be structured as a stock purchase.  If you are a purchaser of stock and intend for the business to continue to fund ongoing operations, rather than for you to contribute working capital, protections must be created to insure that the working capital will not be drained by the seller prior to closing.  Absent restraints in the purchase agreement, a seller is within its rights to collect as many accounts receivable, pay as little accounts payable, and distribute as much cash to the seller as is possible prior to closing.  The purchaser must protect itself against this.  There are two main ways to achieve this. First, insert restrictions in the purchase agreement on the seller’s ability to make distributions prior to closing.  Second, require the seller to have a certain level of assets at closing.  This level could be measured by cash on hand, but is more commonly measured by a minimum working capital amount at closing.  Working capital must be clearly defined so that there is no ambiguity that would allow the seller to avoid this requirement.  By including these requirements in the purchase agreement, you will insure that the business being acquired is in good shape to continue operating in the ordinary course of business after closing. manuggets subscribe2


Glenn D. Solomon Esq. is a principal at the law firm of Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress


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