How to Handle Customer Deposits in a Business Sale
By Mainshares
Jan 15, 2024
Many businesses use customer deposits to smooth working capital needs. By requiring a down payment on future work, owners cannot only offset the purchase of supplies but also incentivize customers to keep their end of the bargain.
When it comes time to sell a business, a question often arises: “Who receives the customer deposits?" From our experience, the short answer is the buyer.
Why? When a buyer purchases a business, they are purchasing a “going concern.” They are not just paying for the business's equipment and inventory. They are also paying for its reputation, future bookings, and employees.
Customer deposits are part of that goodwill. The customers have prepaid for work to be done in the future. By including deposits in a sale, the buyer is able to fund the parts and supplies needed to do the job and ensure that the business continues to operate.
Moreover, from an accounting perspective, deposits do not count as earned revenue. They are not the business's earnings that the seller deserves. In fact, they are the opposite. On a balance sheet, a deposit is treated as a liability. The cash counts as an asset, but the liability is future work that the company owes the customer. Put bluntly; the buyer is on the hook for delivering goods or services to the customer who made the deposit.
Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.
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