📈 Two Cash Metrics For Business Acquisitions

INTRO

It’s Michael.

In today’s issue:

• THE WEEKLY: 📈 Two Cash Metrics For Business Acquisitions

• BEST RESOURCES: Cash Conversion Cycle & Working Capital Calculator

Let me know what you think. Drop a reply or click the poll at the end of this email.

THE WEEKLY

The Situation

Let’s say you saved $50,000. You hear from all the social media gurus that you can build wealth by buying and building businesses. You’re sold. You want to become an acquisition entrepreneur.

A deal came across your table. It looks good on paper. You’ve heard of the success stories, but you’re cautious because you know it ain’t that simple. You feel confident you could run the business, but something feels off. The seller wants to sell the business in a ‘cash-free/debt-free’ transaction. You buy the business without its cash or debt. Which means you have to inject cash into the business.

Before you buy that business, look at the Cash Conversion Cycle (CCC) and Working Capital (WC) requirement to make sure you have enough cash to keep the business operational. 

• The CCC is the amount of time it takes to turn inventory into cash after a sale. 

• WC is the amount of cash you need to keep the business running. 

Info Gathering

First, gather the documents you need to calculate the CCC and WC. Ask the seller or broker for: the Income Statement (IS) and Balance Sheet (BS) for the last 2 years. 

• On the IS, make sure there are the following line items on it: ‘Sales’ and ‘Cost of Goods Sold/Cost of Sales’. 

• On the BS, make sure there are the following line items on it: ‘Accounts Receivable’, ‘Inventory’, and ‘Accounts Payable’.

Calculations

Second, calculate the CCC and WC.

• Step 1: Calculate Days inventory outstanding (DIO)

  • Average time it takes to turn your inventory into cash

• Step 2: Calculate Days sales outstanding (DSO) 

  • Average time it takes to collect accounts receivable from your customers

• Step 3: Calculate Days payable outstanding (DPO) 

  • Average time it takes you to pay your suppliers

• Step 4: Calculate CCC

• Step 5: Calculate Working Capital

Decision

Third, decide if that WC requirement is realistic for you.

In the above example, you need $15,006 minimum.

If you got it, your deal passed this test.

If you don’t got it, my recommendations 👇

• Short-term solutions

  • Get short-term loans / lines of credit from your bank

  • Borrow money against your A/R (aka ‘invoice financing’)

  • Sell your A/R (aka ‘factoring’)

  • Get aggressive with A/R collections (aka keep following up with the customers that owe you)

• Long-term solutions

  • Renegotiate longer payment terms with your suppliers

  • Tighten credit terms with new customers and offer early pay discounts

  • Reduce inventory levels

  • Expand sales & marketing efforts to sell inventory faster & increase prices

BEST RESOURCES

• Download the calculator I used in this edition 👇

THAT'S A WRAP

How I Can Help 💰️ 

I’m the owner of Divergent CPA, an advisory firm that helps business operators and business buyers with:

• Strategic tax & accounting

• Dealmaking

If you’re interested in a strategy call & demo, book a free consult with me 👇 Note: We’re keeping things small intentionally, like a boutique. So, don’t wait.