Taking Excess Cash Out Before the Sale: Dividend, Capital Reduction or Price

This list has one purpose: to settle a question most SME sellers get to too late, namely what to do with the two, three or five million francs the company has built up over the years and does not need to operate. There are three routes: a dividend before the sale, a reduction of capital, or leaving the money in the company and therefore in the price. Each has a cost for the seller and a consequence for the buyer. The ten points below, in the order I go through them with an owner in Switzerland, let you choose deliberately rather than by default. The rules cited are Swiss; the question is not: in Germany or Austria, the same trade-off between distribution and price arises under other tax mechanisms, and the reflex is the same, to do the arithmetic before the buyer does.

Before choosing a route

1. Measure what is genuinely surplus. A company needs a floor of cash for salaries, suppliers and seasonal dips; that floor is often one to three months of costs, more in businesses with long project cycles. Only what sits above it counts as cash "not needed for operations", and that is the notion both the buyer at the negotiating table and the tax administration in its review will work with.

2. Know which pocket you are selling from. If you hold your shares as private wealth, the gain on the sale is in principle tax-free in Switzerland, and every franc left in the price reaches you without deduction; if you sell through a personal holding company, a dividend flows up almost untaxed thanks to the participation relief, which changes the whole calculation. The tax status of your shares decides everything that follows, so check it before the first line of figures.

3. Read the buyer's structure. A buyer who acquires through a bank-financed acquisition company will want to use your cash to repay the loan. If, within five years, they distribute non-operating substance that existed on the day of the sale, and you sold at least 20% of the shares knowing it, the tax authority reclassifies your tax-free gain as taxable income: that is the indirect partial liquidation, and it hits the seller, not the buyer.

The three routes, and what each costs

1. Put a number on the pre-sale dividend. On a holding of at least 10%, the dividend is partially taxed, at 70% federally and between 50% and 70% depending on the canton; the 35% withholding tax deducted by the company comes back to you once you declare the income. As an order of magnitude, a dividend of CHF 2 million costs between CHF 300,000 and 650,000 in tax depending on canton and marginal rate, a figure your accountant should calculate before any decision.

2. Check the ceiling of a capital reduction. Repaying nominal share capital or capital contribution reserves triggers no income tax, but in a founder-run SME both are usually modest: CHF 100,000 of share capital and some paid-in premium. The procedure runs through a shareholders' resolution, a call to creditors, a confirmation by the auditors and the commercial register; allow three to four months, for a ceiling that rarely settles the question on its own.

3. Count what the buyer will actually pay for cash left in the company. No buyer pays a multiple on cash; at best they take it over franc for franc, added to the enterprise value. But no bank lends money to buy cash, and an individual buyer or a management team is short of equity: in the mandates I run, money left in the company frequently ends up discounted, deferred into a vendor loan or simply struck from the price.

4. Combine rather than choose. The most common outcome is a dividend for the bulk of the surplus, repayment of capital contributions for the part that qualifies, and an operating floor left in the company and paid franc for franc in the price. For a seller holding the shares privately, the tax on the dividend is the price of certainty: what left the company before the sale can no longer be reclassified afterwards.

What to lock down

1. Set the date and the mechanics of the distribution. The simplest route is a dividend resolved at the ordinary general meeting on closed accounts, before the letter of intent is signed; since the revision of Swiss company law, an interim dividend on interim accounts is also possible, with an auditor's confirmation if the company is audited. Whatever is distributed must then show up in the price mechanism, or the closing adjustment clause will claw it back, from the buyer or from you.

2. Write the substance clause into the sale agreement. The buyer undertakes not to distribute, for five years, the non-operating substance existing on the day of the sale, or to compensate you for the tax if the authority reclassifies your gain. The clause offers thin protection if the buyer sells on or disappears; its main value is as evidence that you did not take part in a distribution, one of the conditions for the reclassification.

3. Ask the tax administration for written confirmation. Beyond a few hundred thousand francs of surplus, a ruling that fixes with the administration the amount of non-operating substance and the treatment of the planned distribution costs a few thousand francs in fees and a few weeks; it removes the main uncertainty in the whole operation.

Picture an IT services company of 25 people in the canton of Vaud, valued at CHF 6 million, with CHF 2.5 million of cash of which 500,000 is needed for operations; a hypothetical case, not a client. The buyer, a management team with a bank loan, cannot finance the CHF 2 million surplus. The seller distributes 1.8 million before signing, pays between CHF 300,000 and 550,000 in tax depending on the canton, and sells a clean company for 6.7 million. The alternative, leaving the 2 million in the company against a five-year vendor loan, would have exposed the gain to reclassification the day the buyer dipped into it to repay the bank.

Surplus cash is the item sellers most often let decide itself, year after year, because no deadline forces the question. Once the sale is under way, it becomes the buyer's argument: too expensive to finance, too risky to leave, to be discounted. What separates a well-run transaction from the other kind is not the tax rate; it is who did the arithmetic first.