Cash is King. There has never been a truer assertion in the history of business.
It is of paramount important to ALL BUYERS irrespective of whether they have thousands or millions of dollars. Buyers simply do not want to use cash period.
Why?
Leverage – if they have 20,000,000 to invest, they would prefer to buy four companies at 5,000,000 each than one at 20,000,000 or two at 10,000,000.
Risk Mitigation – if they invest 5,000,000 in a company and borrow the rest (standard financing or seller note) they only have 5,000,000 at risk. In today’s environment everyone establishes standalone LLC’s and they do not add a lot of assets to these entities. If a company fails it is typically only the original investment that is lost.
There is a lot of gamesmanship that goes on with seller financing.
It is the role of a serious advisor to screen through and eliminate all of the invalid buyers and invalid offers. There is a very substantial group of buyers that will literally offer 10% or 20% cash and expect the seller to finance the remaining 90% or 80%. They will often times offer a very favorable price to entice (trick/encourage) the seller to go for it.
Most sellers are not dumb enough to turn over ownership (contingent of course) of their company and operational control for 10% or 20% of what they expected to receive for their valuable company.
However, there are 80 other percentages between 20% and 100%. At what point should a seller agree to finance part of the transaction?
There is no one clear concise answer. If the buyer is Apple or Google a seller could feel pretty good about taking a note for 50%. If it is a buyer with a very sketchy image and reputation then not so much.
The very best model for taking a note is when the buyer is overpaying. If your company is worth 10,000,000 and the buyer offers 9,000,000 at closing with a note for 5,000,000 at 8% (total 14,000,000) then you are only really putting 1,000,000 at risk with 4,000,000 of upside. PLUS, keep in mind that if they default you get the company back and you keep the 9,000,000 plus all payments up to the date of default.
Our firm is very conservative on behalf of our clients. In almost all transactions there is a 10% holdback for a designated period of time for indemnity claims. If there are no claims these funds are released from escrow usually after 12 or 24 months after closing.
We strive for a minimum of 80% cash at closing to protect our clients. These funds are payment for years or decades of hard work and they are worthy of protecting fully. This is not the time to gamble and play the long game with your future security.