Jan 19, 2023

How to Handle Customer Deposits in a Business Sale

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Many businesses use customer deposits to smooth working capital needs. By requiring a down payment on future work, owners are able to not only offset the purchase of supplies but also incentivize customers to hold up their end of the bargain.

When it comes time to sell a business, a question often arises: “who receives the customer deposits?”

From Beacon’s experience, the short answer is the buyer.

Why? When a buyer is purchasing a business, they are purchasing a “going concern.” They are not just paying for the equipment and inventory of the business. They are also paying for its reputation, for its future bookings, for its 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, not only is the buyer able to fund parts and supplies needed to do the job, but the buyer is also able to ensure that the business continues to operate.

Moreover, from an accounting perspective, deposits do not count as earned revenue. They are not earnings of the business 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.

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John McCleary
John McCleary
Transaction Advisor

John takes a personal approach when advising buyers and sellers on taking the next step. John has deep knowledge of a variety of markets through his background as a member of the Chicago Board of Trade and experience as a licensed real estate agent in Texas and Michigan. Originally from Detroit, John's passion for automotive runs as deeply as his love of Wolverine Football.

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.