Early cash out value

 Posts: 307
 Joined: Thu Jul 16, 2015 9:36 am
Early cash out value
What is the value of early cash out?
I sold a company. The balance of the payout agreement is $375,000 paid in equal installments quarterly over the next three years, then a final $55,000 payment at the end (January 2023). No interest is being charged on top of these amounts.
The purchaser of the company is interested in paying out the balance as a lump sum, with a discount.
How do I calculate what a reasonable discount is to get paid now?
For this question, ignore tax considerations. I do have a fine appreciation of those and will factor those in after. Also, assume the purchaser will continue to make all payments (ignore the risk of default). What else are factors?
Thanks,
CF
I sold a company. The balance of the payout agreement is $375,000 paid in equal installments quarterly over the next three years, then a final $55,000 payment at the end (January 2023). No interest is being charged on top of these amounts.
The purchaser of the company is interested in paying out the balance as a lump sum, with a discount.
How do I calculate what a reasonable discount is to get paid now?
For this question, ignore tax considerations. I do have a fine appreciation of those and will factor those in after. Also, assume the purchaser will continue to make all payments (ignore the risk of default). What else are factors?
Thanks,
CF

 Posts: 1798
 Joined: Sat Jan 20, 2018 4:02 pm
Re: Early cash out value
This is a Net Present Value calculation and is fairly straightforward. The only variable you need to identify is what is the discount rate?
It's not a trivial concept, and there are loads of web articles attempting to explain it. This one may be helpful: https://www.kitces.com/blog/netpresent ... breakeven/
There is an Excel function NPV that allows you to calculate the Net Present Value. Using it and a 5% discount rate I get an NPV of $342,246.32. If you use a higher discount rate the NPV is lower. Here's a breakdown of NPV calcs:
Rate NPV
3% $354,839.79
5% $342,246.32
7% $330,283.01
Someone with their money in a bond fund might prefer a discount rate of 3%, whereas someone with their assets in stocks would likely use a much higher discount rate.
It's not a trivial concept, and there are loads of web articles attempting to explain it. This one may be helpful: https://www.kitces.com/blog/netpresent ... breakeven/
There is an Excel function NPV that allows you to calculate the Net Present Value. Using it and a 5% discount rate I get an NPV of $342,246.32. If you use a higher discount rate the NPV is lower. Here's a breakdown of NPV calcs:
Rate NPV
3% $354,839.79
5% $342,246.32
7% $330,283.01
Someone with their money in a bond fund might prefer a discount rate of 3%, whereas someone with their assets in stocks would likely use a much higher discount rate.

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Re: Early cash out value
This is called negotiation. There's no correct answer. What number would you take? What number would they pay? I've done this when selling some land that I bought and financed with the previous owner. When I found a buyer, I went to that previous owner and offered a lump sum and they accepted. The number isn't important....it's that you're happy with it and they're willing to pay it. You can certainly ask "What kind of number are you thinking?" and go from there.
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 Posts: 307
 Joined: Thu Jul 16, 2015 9:36 am
Re: Early cash out value
Thanks, I'm looking at Kitces' analysis.ExitStageLeft wrote: ↑Wed Jan 15, 2020 2:18 pmThis is a Net Present Value calculation and is fairly straightforward. The only variable you need to identify is what is the discount rate?
It's not a trivial concept, and there are loads of web articles attempting to explain it. This one may be helpful: https://www.kitces.com/blog/netpresent ... breakeven/
I think I'd go with 4%, slightly higher than a bond fund, but also add on 2% for inflation. A quick browse of Kitces doesn't mention inflation (as it seems to deal mostly with inflationadjusted social security), but that seems a reasonable thing to take into account. So a 6% 'discount rate'. Which seems like a close cousin of opportunity cost?
I think I can plug each payment into a spread sheet and do a calculation to get the NPV for each individual quarterly payment and the final one and add them all up...

 Posts: 1798
 Joined: Sat Jan 20, 2018 4:02 pm
Re: Early cash out value
Using Excel, I input the rate in cell A1 and and a column of thirteen payments in cells A2 through 14. The formula for NPV looked like this:casualflower wrote: ↑Wed Jan 15, 2020 3:43 pm…
I think I can plug each payment into a spread sheet and do a calculation to get the NPV for each individual quarterly payment and the final one and add them all up...
Code: Select all
=NPV(A1/4,A2:A14)
I presume the discount rate is negotiable.
Re: Early cash out value
I agree with Jack. There is no single “correct” answer.Jack FFR1846 wrote: ↑Wed Jan 15, 2020 2:28 pmThis is called negotiation. There's no correct answer. What number would you take? What number would they pay?
If it was me, I’d ask the buyer to make the first offer, since he’s the one asking to go outside the terms of the agreement. Then, I’d check his offer to determine the PV rate, and negotiate from there.
It's a GREAT day to be alive  Travis Tritt