The Playbook by SMBootcamp

Last week we uncovered the hidden threat lurking in many small business acquisitions: the "90-day cash crunch." Often overlooked amid the excitement of closing a deal, cash flow issues can quietly derail even the most promising opportunities.

In part one, we explored why so many entrepreneurs miss the early warning signs of cash crunches, caught up in securing lenders, investors, and seller buy-in, while assuming earnings naturally translate to cash flow.

This week, we're diving deeper with more help from Reid. We’d highly recommend checking out Reid’s information on his website and following him below. He also has a great book about entrepreneurship called Grit it Done.

We're also excited to announce that enrollment for our October and December LIVE cohorts is open. These cohorts offer an exceptional opportunity to learn the right way to successfully navigate small business acquisitions. Seats are limited, so secure your spot today!

Before we dive in, thanks for subscribing and being part of the SMBootcamp community. You’re a big reason this ETA space is what it is. If you know someone exploring small business ownership, we’d love if you shared The Playbook with them and to show our appreciation, we’ve got a few referral rewards along the way.

Common Mistakes Buyers Make

Some of these are more common than others, especially with first-time buyers:

• Overleveraging deals

• Poor working capital negotiation

• Insufficient liquidity

• Ignoring seasonality

• Premature investment

Most acquisition entrepreneurs have heard the guidance of 80% SBA debt, 10% seller note, 10% equity for structuring deals. Historically this was pretty good advice for the vast majority of deals that occurred. When purchase prices are 3x EBITDA you don’t have to be super creative. But nowadays, purchase prices are closer to 4 to 5x That same 80% SBA debt and 10% Seller note turns into more debt with the same amount of cash flow to service it. This means that deals are tighter and free cash flow is meaningfully lower— the margin of error for the acquisition entrepreneur is lower.

Purchase prices have climbed due to greatly increased demand for the concept of entrepreneurship through acquisition (“ETA”). There are more Buyers than Sellers. Many of these buyers do not come from a formal background in M&A (private equity, investment banking, big law, etc.), and there’s a steep learning curve to the ETA process. We see buyers make these mistakes a regular basis. The first of which is ignoring seasonality. Imagine a landscaping Company in Chicago where the deal closes in October. By October, all the grass in the region is dead and the demand for landscaping has disappeared. Without effectively analyzing seasonality of the business, a Buyer wouldn’t have known 80% of the Company’s revenue and 100% of the Company’s profit comes in June-September.

Working capital negotiations can be a major source of headaches for many buyers— and understandably so. Working capital is a strange topic. From the Seller’s perspective, it’s strange they have to give you accounts receivable for work that they completed This means in competitive deals (most are these days) the “winning” buyer is often the one who tells the Seller they can keep some or all of the AR – leading to a working capital shortfall that the acquirer has to manage. Even though the Buyer finally gets to fulfill their dream of being a business owner and CEO, this is usually a terrible position for the Buyer that will lead to a cash crunch unless you’ve effectively allocated a sufficient excess cash balance.

Mitigating the Cash Crunch Before it Happens

As far as mitigation techniques go, there are quite a few pieces of low-hanging fruit that can make a world of difference.

It is advisable to bring more equity (15-20%) than the oft-touted 80/10/10 structure mentioned above. This “extra” equity can either reduce the amount of debt you’d have to use otherwise, or put more cash on the sidelines to be used in a crunch; both are solid ways  to de-risk your deal in the first 90 days (and beyond). Here’s a few examples of how this can play out in the numbers for your transaction. All assume a 2x step-up for investors and the acquisition entrepreneur invests zero equity dollars.

80/10/10

Acquisition Entrepreneur owns ~80%.

Less debt

Acquisition Entrepreneur owns ~70%.

More B/S cash

Acquisition Entrepreneur owns ~75%.

The 5-10% difference in ownership pales in comparison to the risk, we believe it is a low cost way to de-risk the acquisition.

Cash flow reporting is your second line of defense. Many new owners don’t build a system to track and forecast their cash balance day-to-day. It is one of the first things that should be done in any acquisition. The gold standard cash tracker is a 13-week cash flow forecast. It’s a simple rolling spreadsheet that helps you answer one question: “Am I going to run out of money in the next 90 days?” Every week, you update inflows (cash receipts, customer payments, AR) and outflows (payroll, rent, vendor payments, debt service). There are dozens of free templates online, and if you’re using QuickBooks, you can even generate one inside the platform with basically no setup. But like any tool, it does require management and discipline—but it’s one of the core functions as an intentional owner planning for growth and downside scenarios. In the downside case, you’ll know there’s an issue coming up long before it actually happens. This will allow for time to react and make decisions to mitigate total disaster. The key is to quickly implement a cash tracker and cash management systems on Day 1. If you’re already in a cash crunch then decide to put a cash tracker together, you’re too late.

Next up: Working capital. Nobody wants to think about accounts receivable, inventory purchasing, or accounts payable during diligence. But understanding working capital, avoids walking into serious issues. At SMBootcamp, we spend a lot of time digging into working capital because it’s complex and confusing. It’s one thing to define working capital (current assets minus current liabilities), but it’s another thing entirely to truly grasp how it flows through the business, changes seasonally, and acts as a source or use of cash. Buyers routinely underestimate how tricky working capital conversations can be with Sellers, so it’s important to study the fundamentals and analyze trends. Sellers often don’t understand why working capital is so important, and it takes skill to effectively negotiate working capital targets. The worst thing a Buyer can do is blindly accept the Seller’s proposal as the amount of working capital the business needs to succeed without understanding the cash cycles and liquidity needs of the business.

To get this right, Buyers need to:

• Fully map out how AR, AP, and inventory fluctuate throughout on a monthly basis.

• Have the hard (but crucial) conversations with Sellers about what a realistic baseline is for the business going forward and why it makes sense.

• Understand clearly how any shortfall post-close impacts your liquidity. Hint: if the seller note is your only backstop, you’re already in trouble.

Focus heavily on learning the fundamentals of working capital. Understanding exactly how working capital fluctuates in the business will avoid unforeseen failures in the first 90 days (and beyond).

Let’s discuss understanding your cash conversion cycle. If working capital is the engine, the cash conversion cycle (“CCC”) is your fuel gauge. It tells you exactly how long it takes to convert your products or services into actual money. Put simply: it’s the gap (in days) between when you pay for everything required to do the job and when the cash hits your bank account from customers.

If you’re not familiar with the CCC, it’s basically a combination of three key metrics:

• Days Sales Outstanding (DSO): How long it takes, on average, for customers to pay their invoices.

• Days Payable Outstanding (DPO): How many days, on average, you take to pay your vendors and suppliers.

• Days Inventory Outstanding (DIO): The average number of days your inventory sits on your balance sheet before you sell or utilize it.

Many first-time acquirors have never even heard of the CCC (or at least thought of it in this way), but it’s obvious once someone points it out. On paper, it may look like the business will bill customers weekly and collect payments within 30 days, but in practice, there’s a significant cash gap. Inventory must be purchased well before any revenue is recognized. It might sit in the warehouse (DIO) for 10 days, then get deployed to a job that takes another 20 days to complete. Only after that does the 30-day accounts receivable clock (DSO) begin. By the time payment arrives, the business has already been carrying the cost of materials and labor for over a month, often with payroll due and cash tied up. Without enough working capital to bridge the gap, it’s easy to run into a crunch.

 Now here’s an important dichotomy that buyers frequently grapple with:

• Seller Leaves Sufficient Working Capital: The seller leaves behind enough working capital (sufficient AR and inventory) to fully cover the cash cycle until new cash comes in. The new owner doesn’t have to dip into their balance sheet cash or line of credit, but the downside is usually a higher purchase price or difficult working capital negotiation. And sometimes Buyers just get the peg wrong, which can happen even to sophisticated buyers.

• Buyer Brings Extra Balance Sheet Cash: The seller leaves less working capital, or sometimes none at all. The deal looks cheaper, and negotiation might be easier, but now the Buyer is responsible for funding the cash gap by injecting a bunch of cash onto the balance sheet to fund operations until the CCC brings cash full-circle. This is a valid strategy, but only if when the Buyer really understands the cash cycle and has ample liquidity to comfortably cover that period. (Note: this really only works for smaller deals.)

The truth is, either strategy can work. But it needs to be picked deliberately and with full understanding of the implications. If the CCC is 45 days and the Buyer only brought cash for 30, the math is simple: Buyer is out of money on day 31. Make sure you understand how the cash conversion cycle works before choosing which working capital approach is best. Your business (and sleep quality) depend on it.

Lastly, even with the best-laid plans, unexpected cash crunches can still happen. That’s why we’d recommend a "Plan Z" as the last-resort liquidity backstop. This could be a family member, close friend, or an emergency line of credit (hell, your dog if he’s got the cash)— someone who can wire you cash within 24 hours if it became a life and death scenario. You probably won't need it, but if payroll is due Friday and you're short $10k, you'll be thankful you've got that last option ready to go..

Final Thoughts

If there’s one thing you take away from this entire discussion, make it this: post-close liquidity is not optional, but essential. The 90-Day Cash Crunch isn’t theoretical, and it really does happen. It’s the silent killer of SMB acquisitions.

Buying a business will always have risks, but running out of cash in your first 90 days should never be one of them. Do yourself a favor: have excess cash, secure a reliable line of credit, and deeply understand your working capital and cash conversion cycle.

Be smart, stay liquid, and build the cash buffer. Because in SMB-land, Cash is King.

Thank You!

Thanks for reading— and for supporting SMBootcamp. We appreciate you taking the time to explore our insights and hope you found this issue valuable. If you're ready to take your acquisition journey further, check out our programs below. We've designed them specifically to give you actionable, real-world frameworks and support to successfully buy and grow your own small business.