When selling my business, can I cash out at closing? Is it possible to sell my business for all cash? Or do I need to finance a portion of the purchase price?
These are common questions from our clients. Many business owners want all cash when selling their businesses. No muss, no fuss.
So, 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 we mean:
When you ask for all cash, the chances of selling your business significantly decrease because buyers always consider multiple options when buying a business.
It’s unlikely the buyer is looking only at your business on the market. It’s more likely the buyer is considering businesses for sale where the owner is willing to offer financing, or businesses that have been pre-approved for Small Business Administration (SBA) financing (SBA loans are generally limited to $5 million or less), or if they are a company they may be considering other corporate development options for growing their business.
If your business has been pre-approved for SBA financing, we believe you don’t 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. In the article that follows, we give you the buyers’ perspective on this issue, which will make you a savvier seller. You will also read about an important exception to the rule that may surprise you. Let’s get started!
Before we do, though, please take note: The information in this article 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.
Table of Contents
- Why Don’t Buyers of Small Businesses Pay Cash?
- Exceptions to the Rule
- Isn’t it the Buyer’s Responsibility to Obtain Financing for My Business?
- I Still Want to Ask for All Cash. What are My Options?
- Timeline for Selling a Business vs. Terms
Why Don’t Buyers of Small Businesses Pay Cash?
1) Buyers of small businesses are usually industry agnostic and have multiple options.
About 95% of the time, buyers of small businesses priced at less than $10 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, etc.
It is rare for small business buyers to limit their search to one particular type of industry. 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 on the market. 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.
2) Buyers consider sellers who are asking for all cash 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 from the seller and as a warning sign that something may be wrong with the business.
3) Buyers prefer to leverage their money to maximize their returns.
For example, a buyer who has $1,200,000 cash to invest in a business is more likely to buy a business for $2,400,000, as opposed to a business for only $1,200,000. Why? Let’s examine the numbers behind the logic:
Note: We have assumed a ten-year ownership period for both Business A and Business B.
|Business A||Business B||Notes|
|Down Payment||$1,200,000||$1,200,000||The down payment is the same for both businesses|
|Annual Cash Flow||$400,000||$800,000|
|Multiple (Asking Price/Cash Flow)||3.0||3.0||The multiple is the same for both businesses|
|Annual Debt Service||$0||$200,000||Debt service is also tax-deductible, though we have not accounted for this in our calculations.|
|Annual Cash Flow (After Debt Service)||$400,000||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)||33.33%||33.33%||ROI is the reverse of the multiple (1.0/3.0 = 33.33%)|
|Cash-on-Cash Return||33.33%||Years 1-7: 50%
Years 8-10: 66.66%
Would you rather buy Business A or Business B?
Both businesses require the same down payment ($1,200,000). However, 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 debt service.
Most buyers prefer Business B because it offers higher returns (both ROI and cash-on-cash).
In other words, they are buying a business that will put more money in their pockets — $600,000 (for years 1-7) vs. $400,000 — but for the same down payment of $1,200,000. 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 you should consider when calculating ROI is equity building.
Let’s assume that both owners sell their business after ten years. The owner of Business A would receive $1,200,000 for their business, and the owner of Business B would receive $2,400,000 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 (e.g., India, China) 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, such as Islam, forbid charging or paying interest.
About ten 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 $1,200,000 with 50% down.
Isn’t it the Buyer’s Responsibility to Obtain Financing for My Business?
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.
I Still Want to Ask for All Cash. What are My Options?
If you still want to ask for all cash, you have two options:
- Have your business pre-approved for SBA financing. Remember, the maximum loan amount is $5 million.
- Ask for all cash, but discount the asking price by approximately 20%. We have analyzed over 10,000 transactions and, through our analysis, we have calculated that businesses that sell for all cash receive approximately 30% less. You can start with a lower discount, perhaps 20%, and negotiate from there.
Timeline for Selling a Business vs. Terms
We are often asked how long it takes to sell a business, and there is no stock answer.
For a detailed analysis of this question, please read our article, “How Long Does it Take to Sell a Business?”
The time it takes to sell a business depends on several factors. Two important factors are purchase price and the amount of financing offered. Assuming all other factors are equal, a business with a more favorable price and terms will sell more quickly than one with a less favorable price and terms.