Should NOT Ask for All Cash
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.