When an individual or business buys another business, paying the entire price in cash is quite rare, according to the Tenney Group, but this can still happen. This is beneficial to the buyer in many ways. First, many sellers value a cash deal, so they are willing to offer a lower price. Secondly, the buyer will not have to deal with a loan and the interest rate associated with that. Yet, cash deals are not perfect, and those interested in entering into a cash deal should understand the benefits as well as the risks.
Cash Is Attractive to the Seller
Cash is very attractive to the seller of a business. When a buyer pays cash, the seller does not have to worry about financing falling through. The money is there, so the sale can be finalized quickly without hassle. The seller also benefits by receiving the money in one lump sum and having the freedom to walk away from the business.
Still, there are some drawbacks to this. The buyer may want to look for sellers who at least offer buyer financing. This indicates that the seller is confident the business can succeed, even after they sell. It can be an indicator of the business’s viability. Similarly, a seller who is only willing to take cash may have something to hide, especially if they seem like they are in a hurry to sell. Even if the buyer still decides to use cash, finding a buyer with the option to finance is a good idea.
Higher Risk for Buyer
In some instances, paying cash puts the buyer at higher risk. If the buyer pays everything for the business at the outset, and the business fails, the buyer is out the entire purchase amount. If the business is financed, bankruptcy may provide a way out of the loan with less of a loss.
Because of this, the Tenney Group recommends that the buyer always perform a business valuation. This is particularly true with transportation businesses. A transportation business valuation is vital in showing whether or not the potential for success exists with a particular company. No buyer should pay cash for a company without having this study performed first.
Lower Cost for Buyer
Paying in cash almost always costs less. Not only do you eliminate the costs associated with a loan, but you can often negotiate for a lower purchase price as well. This is, perhaps, one of the biggest incentives for those who decide to invest in another business through a cash payment.
In the end, buyers must weigh these pros and cons and decide if the lower cost is worth the increased risk. Because the risk and financial outlook is going to vary from one business to the next, this analytical process needs to be repeated with every potential purchase. The buyer always will be glad that he took the time to make these considerations before investing a large lump sum in a business.