How to Sell ‘Cash-Intensive’ Businesses

Cash-Intensive Businesses

A cash-intensive business is a company that generates a high amount of cash sales from its customers. Often, cash-intensive businesses have customers who prefer to pay or are accustomed to paying for goods or services in cash. Some cash-intensive businesses require its customers to pay in cash. Common examples of cash-intensive businesses are coin laundromats, convenience stores, bars, restaurants, and construction-oriented home services and remodeling firms. Many buyers desire to purchase cash-intensive businesses because they are comfortable owning such businesses and enjoy the benefits of being paid in cash. So long as the cash sales may be proven to overcome buyer suspicions during formal due diligence, the valuation of cash-intensive businesses should be similar to businesses that are not cash-intensive.

Are Cash Sales in Financial Statement?

Businesses are valued based on the current level of annual adjusted owner benefit, or true economic profit derived by a working owner. The annual adjusted owner benefit is measured by the most recent financial statement of the business (such as a tax return or profit and loss statement) which shows its annual gross sales and expenses. Cash-intensive businesses that do not show all of its cash sales within its financial statement (as a part of the recorded gross sales or revenue) will need to otherwise prove that such cash sales actually existed. If not, then most buyers are unlikely to believe that the cash sales existed, and will thus base their valuation of the business on the reduced level of sales and owner benefit shown in the financial statement. Note that lenders will almost never recognize cash sales not recorded in the financial statement.

Proving the Existence of Cash Sales

  • The key to proving the existence of cash sales to a reasonable buyer’s satisfaction is providing some kind of extrinsic evidence.
  • It is also important to place the cash sales in the context of how the business operates and the industry within which it operates.
  • For example, most reasonable and knowledgeable buyers understand the inherently cash-intensive nature of coin-operated laundromats.
  • Few owners of coin-operated laundromats diligently record all of their cash sales in their tax return.
  • Much of the cash also fails to find its way in the bank and thus can not be proven with bank statements.
  • It is still possible, however, for savvy buyers to figure out the approximate level of actual sales for coin laundromats by examining historical utility bills (such as water, power, and gas).
  • Buyers that are familiar with the laundromat industry can gauge the volume or sales based on the level of utility usage.
  • For businesses in the restaurant industry, data in the Point of Sale (POS) system may show the actual sales (including cash sales) where the financial statement does not.
  • Other businesses may also have a paper trail of invoices or receipts which can be used by a reasonable buyer to ascertain the cash sales.
  • This is often the case with construction-related businesses in the home services and remodeling industries where copies of customer invoices may substantiate unrecorded cash sales.
  • The more detailed and believable the extrinsic evidence, the better chance a business owner has of convincing a buyer that the cash sales actually existed.
  • When no extrinsic evidence to substantiate cash sales may be offered, buyers always have the option (subject to the seller’s consent) of closely observing the actual level of sales taken in by the business for a sustained period of time (such as two weeks).

Target Buyers in Industry

Because of the difficulty in proving the existence of cash sales that may not be recorded in the financial statement, it always best to locate and target buyers familiar with the industry in which the business operates. Such buyers are far more likely to understand and believe that a cash-intensive business has a disproportionate amount of cash sales. Many buyers that already do business in a cash-intensive industry are likely to have unrecorded cash sales themselves, and thus will understand that other business owners operate in the same manner. In contrast, buyers that are unfamiliar with the industry in which the business operates have no way of realizing how common it is for certain businesses to accept cash sales, and how prevalent it is for certain businesses to not record all of their cash sales in their financial statement.

Confidentially Sell Cash-Intensive Businesses

The biggest worry for many business owners of cash-intensive businesses when it comes time to sell is their confidentiality. In particular, they wish to keep the sale confidential from any party who may work for a governmental agency (such as the Internal Revenue Service) or who may publicly expose the cash nature of their business operations. This is why experienced business brokers have all potential buyers sign a Non-Disclosure Agreement (NDA) requiring potential buyers to disclose whether they work for any type of governmental agency. The potential buyer must fully complete the NDA and otherwise financially qualify themselves prior to receiving the confidential listing information about the business. Business sales are generally private transactions that do not need the consent or approval of any governmental agency.

The sale of cash-intensive businesses should be handled by an experienced business broker who is able to value the business appropriately based on the sales and income that may be proven to a reasonable extent during the formal due diligence process.  Locating a buyer familiar with the cash-intensive nature of the business being sold along with protecting the confidentiality of the sale at all times will help ensure a successful sale.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.