Sellers Should NOT Ask for All Cash

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It is important that a seller should NOT ask for all cash. These are a few of the reasons:

1. It drastically reduces the number of prospective buyers in the marketplace and will therefore extend the time it will take to sell the business.

2. It gives the buyer the impression that the seller must not confident in the business.

3. It there a lending institution (SBA or other Bank) also providing funds to the buyer, they will not finance goodwill, therefore, if goodwill does exist in your business (and it almost always does), you and/or the buyer will have to finance the goodwill portion of the purchase price.

4. In almost each and every business sale, a higher price can be obtained if terms are offered to the buyer. A buyer will want to discount the ultimate negotiated selling price for a cash sale. Since most small business sales don’t include the seller’s bank accounts or its accounts receivable, a buyer will want to preserve its down payment since additional cash will be needed as working capital to operate the business.

5. The seller’s tax liability on the sale can be deferred if terms are given to the buyer. Basically, the seller will pay its share of the tax liability as the installment sale payments are received from the buyer. If an all cash deal were negotiated, the tax would have to be paid on the entire gain in the year of sale and, as a result, only the net after tax proceeds would be available for the seller to invest.

6. The seller will usually receive more for the business as a result of the interest paid to it over the life of the loan. If a seller is taking back financing, a larger interest rate can be negotiated from the buyer that would otherwise be charged from traditional lending institutions (perhaps 2% or 3% over the prime rate). This final buyer interest rate is almost always greater than the interest rate the seller would receive if he invested the net business proceeds into traditional type investments.