The headline in the February 8, 2011 Wall Street Journal is, “Cash Buyers Lift Housing.” The bottom line is that people are looking for deals and cash talks.
The same is true in business buying. Cash talks and there is a relationship between cash and price. The more cash, the more reasonable the price. Studies have shown that a buyer can pay 15-20% less if the downpayment is high (65-70% of the price) vs. low (35-35% of the price).
In today’s banking climate, a buyer with more cash is an esteemed buyer. Here are three reasons why.
1. Bankers like buyers with cash. The more money a buyer puts into a deal the better. It allows for reasonable debt coverage and allows for a greater chance of the banks ratios and covenants being met.
2. A buyer who can come up with the entire downpayment without a bank puts the seller in first position on assets (collateral). In today’s environment, the SBA (and most loans are SBA guaranteed loans) has certain requirements if goodwill exceeds a certain percentage of the price. This may mean the seller will get no payments for up to a few years or perhaps interest only. And, the bank is in first position on all assets, even after the loan is paid down and assets may significantly exceed the loan balance.
3. A buyer with more cash has a greater chance of success and growth. Because they are not exhausting all avenues of credit they have more credit options available for growth. With earnouts being discussed and used more and more following the Great Recession a seller should be very interested in buyers who have cash and can use it to grow the business and hit the earnout sooner.
The bottom line is that, just like decades, if not centuries, ago, cash talks and gives a buyer and seller more options and a greater chance of a (good) deal. A good deal being one that is fair to both sides, everybody gets paid as planned and the business grows and provides more jobs and profit.