Selling Your Business for All Cash

Many business owners want all cash when selling their businesses. No muss, no fuss. But, there are still a number of questions you may be asking yourself, such as: 

  • When selling my business, can I cash out at closing? 
  • Is it possible to sell my business for all cash? 
  • Do I need to finance a portion of the purchase price? 

Let’s look at some answers to these questions.

Can you sell your business for all cash? 

The short answer is “Yes.” That’s the long answer, too, but your chances of selling your business decrease and your timeline for selling your business increases. Here’s what I mean:

When you ask for all cash, the chances of selling your business significantly decrease because buyers always consider multiple options. It’s unlikely the buyer is looking only at your business. It’s more often the case that the buyer is considering businesses for sale where the owner is willing to offer financing or businesses that have been pre-approved for SBA financing. If the buyer is a company, they may be considering other corporate development options for growing their business.

If your business has been pre-approved for SBA financing, I don’t think you need to offer seller financing as a second alternative. You can limit your search to buyers who are interested in purchasing your business only with SBA financing. This means you will effectively “cash out” when you sell your business, with the exception of a small note you may be required to carry, which is typically less than 10% of the purchase price.

So, again, yes, you can ask for all cash for your business, but there could be consequences. 

The information in this chapter primarily applies only if the buyer of your business is likely to be an individual or small competitor. It does not apply if the likely buyer is a mid-to-large-sized competitor, another company, or a financial buyer, such as a private equity group. These buyers often pay cash or put down up to 90% cash at closing.

Small Business Buyers and Cash Offers 

There may be several reasons why buyers won’t pay all cash for the purchase of a business, so let’s look at a few of the biggest.

Buyers Look at Lots of Options for Businesses to Buy

Individual buyers of small businesses are usually industry agnostic and have multiple options. About 95% of the time, individual buyers of small businesses priced at less than $5 million are not looking to buy one specific type of business. They are usually considering businesses in a variety of industries, such as service-based, retail, manufacturing, or others. 

It is rare for small-business buyers to limit their search to one particular type of industry, unless the buyer is a corporate buyer, such as a competitor or private equity group. The primary exception is highly specialized businesses, such as professional service firms and other niche businesses that require a unique set of knowledge or skills.

Buyers are often looking at hundreds of businesses for sale. As a result, they have a wide variety to choose from and tend to migrate toward businesses that can be financed, either through the seller or the SBA. 

Buyers tend to dismiss business owners who are asking for all cash unless the business has been pre-approved for SBA financing.

Sellers Who Are Asking for All Cash are Considered Unrealistic

Buyers are wary of sellers who want to take the cash and run, figuratively speaking. They see this as a lack of faith in the business and as a warning sign that something may be wrong.

Buyers Maximize Their Returns Through Leverage

For example, a buyer who has $1.2 million cash to invest in a business is more likely to buy a business for $2.4 million as opposed to a business for only $1.2 million. Why? Let’s examine the numbers behind the logic:

Maximizing Returns Through LeverageAssuming a 10-year ownership period for both businesses
Business ABusiness BNotes
Asking Price$1,200,000 $2,400,000
Down Payment$1,200,000$1,200,000The down payment is the same for both businesses.
Multiple (Asking Price/Cash Flow)3.03.0The multiple is the same for both businesses.
Annual Debt Service$0$200,000Debt service is also tax-deductible, though I did not account for this in the calculations.
SDE (After Debt Service)$400,000Years 1-7: $600,000Years 8-10: $800,000The debt used to acquire the business will be fully repaid in 7 years for Business B. After 7 years, SDE will increase to $800,000, which is double that of Business A.
Return on Investment (ROI)33.33%33.33%ROI is the reverse of the multiple (1.0/3.0 = 33.33%).
Cash-on-Cash Return33.33%Years 1-7: 50%Years 8-10: 66.66% 
Information Sources

Would you rather buy Business A or Business B?

Both businesses require the same down payment, but Business B is offering 50% financing. Business B also has a higher cash flow, which means the buyer will put more money in their pocket, even after paying the debt service. 

Most buyers prefer Business B because it offers higher returns, both as a return on investment and cash-on-cash return.

In other words, they are buying a business that will put more money in their pockets – but for the same down payment of $1.2 million. Also, because Business B offers financing, this implies that the seller of Business B has more faith in their business, which is likely to make the buyer more comfortable.

Business B also builds more equity in the long term.

One additional principle to consider when calculating ROI is equity building.

Let’s assume that both owners sell their business after 10 years. The owner of Business A would receive $1.2 million for their business, and the owner of Business B would receive $2.4 million for their business excluding any growth in value. Essentially, the owner of Business B used the cash flow of the business to pay for itself.

You have heard it before, but terms are often more important than purchase price.

Exceptions to the Rule

As with everything in life, there are exceptions, and in business sales, there is one principal exception. Americans love financing just about anything they purchase. 

However, some cultures prefer to pay cash as they are philosophically, culturally, or religiously opposed to the idea of paying interest and being burdened by debt, even though the ROI may be higher. Additionally, some religions forbid charging or paying interest.

Several years ago, I was selling a gas station for a couple of million dollars. In a conversation I had with the seller, who happened to be from Lebanon, we discussed structuring the promissory note. I asked the seller his preferences regarding the interest rate. He told me 0%. I thought the seller misheard me, so I asked him again. He again told me 0% and that he was forbidden from charging or receiving interest payments. I later learned that Islam prohibits charging interest, even at low interest rates.

This is most common in culturally-diverse cities, such as Los Angeles, Seattle, or Miami, in which a buyer may be open to paying all cash, though they often expect a discount.

For these types of businesses, we recommend two prices: an all-cash price and a seller-financed price. The price difference usually needs to be about 20% to make sense. For example, you can ask $1 million all cash or $1.2 million with 50% down.

Isn’t it the buyer’s responsibility to obtain financing? 

Yes, the buyer must also meet the requirements for approval, but your business must be able to generate sufficient cash flow to repay the debt service.

A valuable criterion for any buyer is the availability of financing. Assets that can be financed are more easily bought and sold, and the markets tend to be more liquid for them than for assets where no financing is available.

How many cars could Ford Motor Company sell if no banks would finance them?

If you own a business and are willing to offer financing or if SBA financing is available, you can expect to sell more quickly and more easily than if you are asking for all cash.

If you still want to ask for all cash, what are your options?

If you still want to ask for all cash, you have two options:

  1. Pre-Approval: Have your business pre-approved for SBA financing. Remember, the maximum loan amount is $5.5 million.
  2. Discount Price: Ask for all cash, but discount the asking price by approximately 20%. I have analyzed over 10,000 transactions and through my analysis, I have calculated businesses that sell for all cash receive approximately 30% less. But you can start with a lower discount, perhaps 20%, and negotiate from there.