How do you cover payroll 1 month following acquisition?
August 14, 2024
by a searcher from Morehouse College in Washington, DC, USA
I had a deal fall through last year because I didn't have enough working capital and the bank wasn't willing to lend the entire amount that I needed. In summary it was a professional services firm with nearly $4M in annual revenue. Monthly payroll was about $200K and accounts receivables were collected on net 60 terms. The firm was a government contractor so the income was guaranteed but the challenge was covering the $400K needed for those 60 days while also covering my equity injection. Plus I wanted additional wiggle room for any unexpected incidentals and debt coverage. Basically $600k working capital would have been a sweet spot. Someone else came and offered the full asking price with no concessions or accounts receivables included in the purchase. The seller liked me more but didn't want to turn down an offer for exactly what they wanted (which i completely understand and would have done as well) ... had I been able to match I would have gotten the deal.
So now my question is ...
How would you have salvaged this deal? What buying strategy, negotiating tactic, or lender / investor would you have leveraged to get the deal done?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Just because someone else is wiling to pay more or do the deal without working capital, it does not mean it is a good deal for them. They could be over-paying. Or they may be a strategic or a larger firm either putting more money down or with the cash to cover the working capital.
The other issue that could have existed is that not all lenders are alike. Some do not like to provide much working capital. So it could have been a lender issue as well, but again hard to know without looking at the free cash flow.
If you ever have questions or need another set of eyes to look at something from a lending perspective, we would be happy to assist you. We do not charge anything to review a deal for a client and work purely on a Success Fee basis on the financing side. You can reach me here or directly at redacted
in Stuart, FL, USA
In most cases, if you had a lender that was a bit more flexible it's very easy to prove that you need more money to cover the payroll, especially considering the government contracts. I would be curious to know which lender you went to.
A lot of lenders are concerned with giving away too much working capital in the event the loan goes into default. They feel once the file is audited, they may not be able to receive their repair (SBA Guaranty Fee). That said if the explanation and corroborating credit memo offer a very good explanation, (i.e. Government contracts), the lender is covering their backside, and it shouldn't have been an issue.
Another way the lender could have been looking at it is possibly that you were buying more business than you could afford, and they didn't want to be on the hook for all the working capital. If everything you had was going toward the equity injection and there was virtually not much left for post-closing liquidity or working capital, they may have felt that you are buying too big a business