He Had $400K In Cash Flow And Ran Out Of Money In 90 Days

Profit and cash are not the same thing, and the gap between them has bankrupted more good buyers than any bad price ever has.

A buyer called me last spring, four months after closing on a regional distribution company. The deal looked clean. He paid a fair multiple, the seller carried a note, the bank was happy. On paper he was sitting on $400K a year in cash flow. He was calling me because he could not make payroll on Friday.

The Deal That Looked Funded and Wasn't

Here is the thing nobody tells you when you buy a business. The day you close, the seller takes the bank account with him. Every dollar of cash sitting in that company on closing day is the seller's money, not yours, unless you negotiated for it to stay. Most buyers never think about that until the first time a big invoice comes due and there is nothing in the account to pay it.

This buyer bought a business that collected from its customers in 60 days but paid its suppliers in 30. That is a 30-day hole he had to fund out of his own pocket, every single month, on top of the loan payment. The business was healthy. The cash conversion cycle was not. Those are two different problems, and only one of them shows up in the listing.

On a business doing $3.2M in revenue, three months of operating runway is roughly $800K. He had funded his down payment, his closing costs, and a small cushion. He had not funded the gap between when he pays and when he gets paid. That gap is working capital, and it is the most expensive thing to learn about after the fact.

Why Three Months of Revenue Is the Floor

In the Bulletproof criteria I want to see working capital equal to at least three months of revenue before I call a deal fundable. People hear that and assume it is conservative padding. It is not. It is the minimum buffer that lets a business survive one slow quarter, one late-paying customer, one supplier who suddenly wants cash on delivery instead of net 30.

I have watched this exact movie play out on a dozen deals in the last few years. A buyer gets so focused on the purchase price and the loan structure that the working capital line becomes an afterthought, a number they will figure out later. Later arrives in the form of a Friday payroll they cannot meet, and suddenly a profitable business is one missed paycheck away from losing its best people.

Let me show you what this looks like in your numbers. Say you are buying a $2M business with $500K in cash flow. Your down payment at 10% is $200K. Your closing costs run another $50K. If you stop there, you have funded the purchase and nothing else. Now add three months of revenue as working capital. On a $2.4M revenue business that is $600K. Your real cash in is not $250K. It is closer to $850K. After 35 years of looking at these, that is the number that separates the buyers who keep the business from the ones who give it back to the bank.

Banks will lend you the money to buy the business. They will not lend you the money to run it. That part is on you.

You can run this in 60 seconds at DealScore Pro. Plug in the revenue, the cash flow, the structure, and watch the working capital requirement populate. It is the line most buyers skip and the one that decides whether you sleep at night in month three.

A business can be profitable and still go broke. The bank account doesn't care how good the P&L looks.

How to Fund the Gap Before You Sign

There are three ways to solve this before it becomes a Friday-payroll problem. First, negotiate for the cash and receivables to convey with the business at closing. Sellers expect to keep it, but it is negotiable, and a seller who is motivated will trade it. Second, size your SBA loan to include a working capital tranche. The 7(a) program allows it, and most buyers do not ask. Third, fund it yourself out of reserves and treat it as part of your true cash in, not a surprise.

The buyer who called me solved it the hard way. He took a second draw on a line of credit at a rate that ate into his margin for a year. He kept the business. He just paid a premium to learn a lesson he could have learned on page two of the offer. Read between the lines of any deal and the working capital story is sitting right there, in the difference between how fast money comes in and how fast it goes out.

What This Means For You

If you are evaluating a deal right now, stop looking at the purchase price for a minute and calculate three months of revenue. That is your working capital floor, and it belongs in your cash-in number before you ever sign an LOI.

I walk through the entire fundability checklist, working capital included, in my free 28-minute masterclass. It is the same set of criteria I used to keep that buyer's business alive. If you want to see a bad-cash-flow trap before you fall into it, that is where I would start.

Want to see how I stress-test every deal against cost shocks, revenue dips, and hidden liabilities before I'd put a dollar at risk? I walk through the entire Bulletproof method in a free 28-minute masterclass.

Forward this email. Tell them to grab Mike's free book - Real Estate Is for Suckers: Buy a Business Instead. Same framework Mike uses to stress-test every deal.