Can I Sell My Business for All Cash?
When it comes to selling your business, the question of cashing out at closing often arises. Many business owners prefer the simplicity of an all-cash transaction, but is it always achievable?
In short, the answer is “Yes.” However, it’s important to understand that while it’s possible to sell your business for all cash, this choice may impact your ability to sell quickly and attract potential buyers. Here’s the breakdown:
Opting for an all-cash sale can decrease your chances of selling your business promptly. Buyers typically explore various options when acquiring a business.
It’s unlikely that a buyer is exclusively considering your business in isolation. They may be looking at businesses for sale with seller financing offers, those pre-approved for Small Business Administration (SBA) financing (typically limited to $5 million or less), or corporate development opportunities if they are a company.
If your business is pre-approved for SBA financing, you may not need to offer seller financing as an alternative. Instead, you can focus on buyers interested in purchasing your business solely through SBA financing. This essentially means you can “cash out” upon the sale, with a minor note, usually less than 10% of the purchase price, being the exception.
So, in summary, yes, you can request an all-cash sale for your business, but it’s essential to weigh the potential consequences. In the following article, we provide insight into the perspective of buyers on this matter, equipping you with valuable knowledge to become a more informed and effective seller. Additionally, you’ll discover an intriguing exception to this rule that may surprise you. Let’s dive in!
Please note that the information in this article primarily applies to scenarios where the likely buyer of your business is an individual or a small competitor. It may not be applicable if your potential buyer is a mid- to large-sized competitor, another company, or a financial buyer such as a private equity group. In such cases, cash deals or significant cash down payments are more common.
Why Don’t Buyers of Small Businesses Pay Cash?
1) Buyers of small businesses often maintain a broad spectrum of interests and options.
In the realm of small businesses priced at less than $10 million, buyers typically cast a wide net. Their considerations span various industries, encompassing service-based, retail, manufacturing, and more. The norm is for buyers to explore diverse opportunities rather than confining themselves to a single industry. There are, however, exceptions in the form of highly specialized businesses, like professional service firms, or niche enterprises requiring specific expertise.
Given the extensive array of businesses available for sale, buyers evaluate a multitude of options. They tend to gravitate towards businesses offering financing possibilities, whether through the seller or Small Business Administration (SBA) channels. Consequently, sellers who insist on an all-cash deal may find themselves with fewer interested buyers, unless their business has secured pre-approval for SBA financing.
2) Buyers view sellers requesting an all-cash transaction with skepticism.
From a buyer’s perspective, sellers seeking an immediate cash exit may raise concerns. This preference for a swift departure may signal a lack of confidence in the business and potentially trigger apprehensions about its overall health. Consequently, buyers may view such requests as cautionary signals and approach them with caution.
3) Buyers opt to harness their capital for enhanced returns.
Consider this scenario: a buyer with $1,200,000 in cash reserves for investment. In most cases, they are inclined to explore a business valued at $2,400,000 rather than one priced at just $1,200,000. The rationale behind this choice becomes clear when we dissect the financial dynamics:
Note: We have assumed a ten-year ownership horizon for both Business A and Business B.
|The down payment is the same for both businesses
|Annual Cash Flow
|Multiple (Asking Price/Cash Flow)
|The multiple is the same for both businesses
|Annual Debt Service
|Debt service is also tax-deductible, though we have not accounted for this in our calculations.
|Annual Cash Flow (After Debt Service)
|Years 1-7: $600,000
Years 8-10: $800,000
|The debt used to acquire the business will be fully repaid in 7 years for Business B. After 7 years, cash flow will increase to $800,000, which is double that of Business A.
|Return on Investment (ROI)
|ROI is the reverse of the multiple (1.0/3.0 = 33.33%)
|Years 1-7: 50%
Years 8-10: 66.66%
Which business would you choose: Business A or Business B?
Both businesses necessitate an identical down payment ($1,200,000). However, Business B offers 50% financing and boasts a superior cash flow, ultimately ensuring the buyer’s pocket sees more green, even after servicing the debt.
For most buyers, the preference leans toward Business B due to its promise of higher returns, encompassing both ROI and cash-on-cash.
In simpler terms, they’re acquiring a business that will fatten their wallets with $600,000 (for years 1-7) compared to Business A’s $400,000, all while investing the same $1,200,000 down payment. Furthermore, the financing option presented by Business B implies a stronger belief in the business from the seller’s side, fostering a greater sense of security for the buyer.
Not to forget, Business B also charts a more robust path to equity growth over the long haul.
One additional point to ponder when calculating ROI is the art of equity building.
Imagine both business owners sell their ventures after a decade. The proprietor of Business A pockets $1,200,000 from the sale, whereas Business B’s owner reaps $2,400,000 for their enterprise (exclusive of any value growth). Essentially, Business B’s owner allowed the business’s cash flow to fund itself.
As you’ve probably heard before, it’s not just the purchase price; often, the terms are the true game-changers.
Exceptions to the Rule
In the realm of business sales, as in life, exceptions exist. One principal exception stands out: Americans tend to favor financing for nearly every purchase they make.
Yet, it’s worth noting that various cultures, such as those in India and China, hold a preference for cash payments, often rooted in philosophical, cultural, or religious beliefs that eschew the notion of interest payments and the weight of debt, even when the potential return on investment is higher. Moreover, certain religions, like Islam, expressly forbid the charging or payment of interest.
Around a decade ago, during the sale of a multi-million-dollar gas station, I had a conversation with the seller, who happened to be of Lebanese descent. We deliberated over the terms of the promissory note, specifically addressing the interest rate. To my surprise, the seller firmly asserted 0%. Perplexed, I inquired once more, only to receive the same response: 0%. It turned out that his religious beliefs forbade him from either charging or receiving interest payments.
Instances like these are most common in culturally diverse urban centers, including Los Angeles, Seattle, or Miami, where a buyer might be inclined to opt for an all-cash transaction while anticipating a corresponding discount.
In such scenarios, we recommend presenting two pricing options: an all-cash price and a seller-financed price. Typically, the price differential should hover around 20% to be justifiable.
For instance, you could propose a straightforward $1 million all-cash deal or, alternatively, a $1,200,000 deal with a 50% down payment.
Isn’t it the Buyer’s Responsibility to Obtain Financing for My Business?
Indeed, the buyer’s qualifications for approval play a crucial role, but your business must possess the capacity to generate adequate cash flow for servicing the debt.
One valuable yardstick for potential buyers is the accessibility of financing. Assets that can be financed tend to be more fluid in the market, making buying and selling them a smoother process compared to assets with no financing options.
Consider this: How many cars could Ford Motor Company sell if banks suddenly ceased to offer financing options?
As a business owner, if you’re open to offering financing or if SBA financing is on the table, you can anticipate a quicker and smoother sale compared to insisting on an all-cash transaction.
I Still Want to Ask for All Cash. What are My Options?
If an all-cash sale is your preference, you have two straightforward options:
- Obtain pre-approval for SBA financing. Keep in mind that the maximum loan amount is capped at $5 million.
- Request an all-cash payment, but be prepared to discount the asking price by around 20%. Our extensive analysis of over 10,000 transactions has shown that businesses selling for all cash typically receive approximately 30% less. You could initially consider a lower discount, such as 20%, and be open to negotiation from there.
Timeline for Selling a Business vs. Terms
We frequently field the question, “How long does it take to sell a business?” However, there’s no one-size-fits-all answer to this inquiry.
For a comprehensive exploration of this topic, we invite you to delve into our article, “How Long Does it Take to Sell a Business?”
The timeline for selling a business hinges on numerous variables. Among these, two pivotal factors are the sale price and the financing options available. Assuming all other aspects remain constant, a business boasting an attractive price and favorable terms is likely to find a buyer more swiftly than one with less enticing terms.