DLA (Liability) and Cash in bank treatment in M&A

Treatment of Director Loan Account (Liability) of £66K and Cash in Bank £96K in an acquisition

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Hi all,

I am buying a Franchise Business which has consistently made profits in the past 3-5 years. 

The owner is looking for a quick sale, however, wants the Cash in Bank (£96K) out in addition to the consideration amount.

I am fine with that, however, the Balance sheet also shows a Director Loan Account of £66K. 
 

The current owner wants to do a share sale and wants me to take long-term liabilities. So what I am proposing is that if the Director takes out the money from the Bank, but at the same time they should write off the Director's Loan Account.

I am not an accountant, but want to know what is the standard industry practice.

Thanks in advance from your support.

Replies (13)

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By Sandnickel
29th Apr 2024 19:42

There isn't an industry standard. It is an agreement between buyer and seller.

When you say directors loan, do you mean the company owes the director £66k? Or the other way around? Is this amount not considered within the consideration?

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Replying to Sandnickel:
By Ruddles
29th Apr 2024 20:20

OP says that the loan account is a liability, suggesting amount due to director. In which case he simply withdraws £66k cash against it. How he extracts the other £30k is up to him. But depending on the terms of the deal and other factors he might be better leaving it in.

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Replying to Ruddles:
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By Paul Crowley
29th Apr 2024 20:31

+1
But might be better for buyer to just buy the bare bones, not buy the money.
@OP
You really need advice on what is best for you. Due diligence on the accounts and a robust agreement should demons be discovered.

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Replying to Paul Crowley:
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By RohitK
29th Apr 2024 20:51

Definitely makes sense. Wanted to understand the norms and everyone's experience before I send out and head of terms which will be subject to due diligence.

Appreciate the support.

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Replying to Ruddles:
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By Sandnickel
29th Apr 2024 20:53

Having recently been told by a client that a liability can mean either a debit or a credit I will always hedge my bets on what people mean.

Never assume anything.

Thanks (4)
Replying to Sandnickel:
paddle steamer
By DJKL
30th Apr 2024 11:14

It means the window side.

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Replying to Ruddles:
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By RohitK
29th Apr 2024 20:55

Sounds good Ruddles.

Owner wants the entire money out of the business, so my thought process was to assume business liabilities, i.e., asset related loans, but not to take the Director's loan liability.

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Replying to Sandnickel:
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By RohitK
29th Apr 2024 20:49

Yes, the company owes the Director.

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Replying to RohitK:
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By Sandnickel
29th Apr 2024 20:55

So they want £96k plus £66k plus an undefined amount for the sale? Wouldn't it be easier to define the amount needed and take that as a starting point?

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Replying to Sandnickel:
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By RohitK
29th Apr 2024 21:27

They have just mentioned £50K for the business and cash in bank. My thoughts are to exclude any Director's Loan from the consideration post close.

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By accountaholic
30th Apr 2024 13:04

Would it be easier for the company to use £66K of the £96K cash to settle the loan first. That takes one of the complications away, then you can assess if £50K is fair for the value of the business, and if any of the remaining £30K cash is surplus to normal requirements and could be added to the deal.

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Replying to accountaholic:
By Ruddles
01st May 2024 12:24

"someone" said that 2 days ago ;¬)

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By Martin B
01st May 2024 12:17

Best seek professional advice. It will be money well spent and you will need and accountant going forward.
Quick sale= warning to me.

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