Introduction

What is the “90-day cash crunch”? Put simply, the 90-day cash crunch refers to the business running out of cash within the first 90-days. Now, it might seem like quite a daunting task to tank a business so quickly to end up without liquidity in something as little at 90 days, but it happens more often than it might seem. Though we do not contemplate a cash crunch beyond the 90-day period in this article, many of these concepts can be applied to any stage of operating a business. Understanding the root causes outlined here is a great start to mitigating future cash flow issues. At the end of the day, the entire Entrepreneurship Through Acquisition (“ETA”) concept relies on two fundamental concepts: 1) an effective acquisition, and 2) effective operations. One without the other leads to failure (most of the time).

For the acquisition, the buyer (who often is a first-time buyer in SBA funded ETA deals) could make an incorrect analysis of sufficient working capital. In one scenario the buyer under-negotiates working capital because it was the only way to get the deal done. In another similar, but related example, Buyers often choose to maximize post-close ownership rather than post-close liquidity leaving little in the way of excess cash to float for any unforeseen cashflow issues. Lastly, the Buyer did not fully understand the ramifications of not asking for a line of credit (“LoC”) from their lender. Though this happens less frequently than it used to, there are still Buyers out there who do not have an LoC available for additional liquidity. And worse, some banks don’t even offer them! Lastly, in SBA transaction escrows and holdbacks are frowned upon thus a working capital true-up ends up changing the Seller note that isn’t paid until years down the road; but you need cash now!

On the operations side is where it gets more difficult. Employees can leave when they find out the owner sold the business. They might just march into the new owner’s office to ask for a raise or a bonus— and if they don’t get paid they walk. The #1 customer the Seller’s known for 15 years decided to go with another service provider since his relationship left. Not to mention this is all happening while the new owner’s learning a new business in an industry they (likely) haven’t worked in before.

One thing is guaranteed in small business— expect the unexpected. There are hidden costs in any transition and for that reason… Cash is King, especially in your first 90 days.

Understanding the Hidden Costs of the Transition

On the most basic level, an acquisition entrepreneur is purchasing a business with limited industry or executive experience. Naturally there will be hiccups and learning experiences. It will require an immense amount of grit and hard work (Grit it Done is an excellent read for aspiring acquisition entrepreneurs). In every acquisition or entrepreneurial endeavor, there will be trials and tribulations. Among those are the Hidden Costs of the Transition.

• Initial performance dips
• Working capital surprises
• Side effects of starting a new entity
• Contract cancellations and client attrition
• Employee turnover and retention issues
• Logistical issues in receiving payments

When thinking of initial performance dips, the term “J-curve” likely comes to mind. This usage of the term J-curve requires clarity… used correctly, it refers to investment in the business that results in a short-term performance dip, but long-term growth driven by said investment. But we will be coining this new term, the “U-curve”, since the beginning and end of the letter end up in the same spot. As mentioned above, the acquisition entrepreneur is entering a new industry, likely for the first time and likely with limited executive experience. Based on what we’ve seen in our experience working with hundreds of individuals through the process, the “U-curve” drop is often somewhere in the range of a 10-15% revenue dip within the first few months of ownership. This is a precarious position to be in, especially if there is leverage on the business, and can provide a significant drain on cash flow.

This is where analyzing the strength of the balance sheet becomes critical. We see two common outcomes: i) In some cases the Seller takes the inventory and AP while the Buyer brings the working capital ii) the Seller leaves a pre-determined amount in the business while the Buyer infuses the balance sheet with cash. Both methods are viable when proper Balance sheet diligence is done.

Let us now transition to a major contributor of cash flow issues— the working capital true-up. In larger private equity transactions, there will often be some of holdback or escrow as the source of any working capital deficit agreed upon in the purchase agreement. In SMB-land these don’t often exist, primarily because the SBA frowns upon them. That leaves buyers and sellers with a natural remedy to cure any shortfall in the deal: The Seller Note. Seller notes are often used as the purchase price adjustment mechanism since it’s fairly easy to adjust post-closing. The challenge with the Seller note is that by definition they’re paid over time (and often on a multi-year standby period). If the Seller doesn’t leave enough working capital, then the Buyer is still stuck fronting the cash now and getting a remedy years down the road which does not alleviate the cash crunch.

Perhaps the most forgotten of the list is the side effects of starting a new entity. Asset deals are more common than stock deals in SMB land— and for good reason. They limit a TON of the liability that the buyer takes on from the Seller’s entity, but they have downsides. Starting an entity without history has ramifications that are often forgotten about by first-time acquirors. New entities often lose their credit with vendors resulting in net zero terms! All of a sudden that cash conversion cycle that looked so clean on the spreadsheet has climbed by 30 days, leading to a HUGE strain on cash. Instead of having 30 days (assuming net 30 terms) to come up with the money to fund purchases, the Buyer has to dip into the bank account immediately. Over time the business will build up credit with the vendor or re-apply for net 30 payment terms again, but for the initial period of your ownership net zero terms might be the reality.

With asset purchases, the business will be using entirely new bank accounts, leading to unexpected days sales outstanding (DSO) spikes. Each check that comes in from the mail, the dreaded snail mail, will have to be deposited. But customers have the old entity name written on the check… so sometimes the bank might just deny the deposit, especially when the new entity name is different). Buyers might end up in a scenario where they’re fighting the bank to deposit those checks. Even The few extra days it takes to deposit checks can be the difference between making payroll or not.

Most would think something as mundane as a PO box wouldn’t cause a crisis, but it happened to a sophisticated buyer with industry experience and a PE background. The change of PO Box, increase in DSO and the choice not to get a LoC caused the operator to have to raise additional money from investors. Many sellers close out their old PO box without thinking, and checks get lost in USPS limbo. Or worse, customers keep sending payments to the wrong address and Buyers don’t even know they’re missing them until the balance sheet looks strange. And since there’s a new entity, the bank might not accept the check anyway since the name doesn’t match perfectly.

Now here’s one most Buyers likely thought about for the transition: employee retention. And this is one that we mentioned in our prior article, “What to do after you buy a business”. Put simply, employees don’t like acquisitions. At the very least, it injects uncertainty into their livelihood. And at the very most, they hold a vendetta against new ownership, because they thought they’d be the Seller’s successor. Some are more benign than others, but all of these are suboptimal scenarios. There are a few different ways these materialize to put a damper on cash flow in your first 90 days as the new business owner. Both Reid and I have lived through these scenarios and have mentored hundreds (if not thousands) of acquisition entrepreneurs by educating through SMBootcamp and Reid’s career as an ETA Professor.

Two recent examples of SMBootcamp alumni that stick out to illustrate what can happen: The license qualifier for a blue-collar trades business demands a raise or he leaves. If he leaves, the business can’t actually make any money until a new qualifier is found (probably more expensive), so the new owner could be out of luck if the employee doesn’t get a raise (also expensive). Yes, this actually happens. Employees know they have leverage and will probably leave if it doesn’t go their way. And any raise or bonus has just added unexpected cost to an already tight cash budget (amongst other cultural and signaling issues).

The other example is something less drastic, but nonetheless hurtful for cash flow. The dispatcher left, leaving a very clear gap on an already small team. The result was new leads were missed and the business had scheduling hiccups leading to lost time on existing work.

A graduate of one of Reid’s classes bought a business with a lead mechanic who left shortly after close despite the buyer having met with the team member as part of diligence and being assured by the team member that they would stay.

At the end of the day, employees are people, and people react unpredictably, especially when their livelihoods feel uncertain. Unfortunately, there isn’t any spreadsheet cell for the transition process. It’s not always catastrophic, but it is always disruptive.

Contract Cancellations and Customer Attrition

Now let’s delve into contract cancellations and customer attrition. Now admittedly, this one only affects a sub-segment of SMB acquisitions, particularly those with customer concentration, but nonetheless warrants awareness. Let’s imagine for a second there is a business with $2m of revenue, 50% gross profit margins, and 20% EBITDA margins where the top customer is equal to 20% of total revenue (which isn’t uncommon in SMB land). For sake of example, we’ll assume that revenue is equally distributed throughout the year and each customer generates the same gross margins.

If that customer disappears during the ownership transition, then there’s a major issue. We see a massive cash decrease of almost $17k per month! Customer attrition and contract cancellation happen for a variety of reasons outside of your control:

• The seller had a 20-year relationship and played golf with the decision-maker every quarter (those relationships don’t transfer with an APA…)
• The customer goes out of business
• The customer gets acquired and goes with the acquirer’s preferred vendors

Whatever the reason, it can cause immediate and severe damage to a P&L, and more importantly the short-term bank account. Here’s the real kicker: despite your best efforts this can get missed during diligence.

So here’s the question: if a major customer leaves on Day 10 of ownership, or any of these cash flow hiccups occur, will the business still make it on Day 90? This is exactly why liquidity at closing isn’t just a smart move— it’s a survival tactic.

Why Liquidity is Essential at Closing

Employees demanding a raise, a bank that won’t accept deposits, vendors won’t give payment terms, and a few checks got lost in the Seller’s P.O. box. Sounds like quite a nightmare in the first 90 days— one that very well could sink the ship without preparation. Liquidity at closing isn’t just a financial concept-- it is an insurance policy against the 90-day cash crunch and potentially personal bankruptcy. It’s your get-out-of-jail free card when something unexpected (edit: guaranteed) happens. And it’s what gives a new owner room to learn, adapt, and operate without making panicked decisions that end up creating long-term consequences.

Let’s break it down:

• You need real cash on the balance sheet. Ideally, you walk into ownership with cash on the balance sheet and a line of credit in place. Now how much cash is a different, more nuanced question that depends on the company’s cash conversion cycle and working capital intensity. The way we like to think about it is in X days of operating expenses and/or monthly sources and uses from working capital swings. The line of credit can be a difference maker when selecting lenders for a deal; you might have to make a tough decision on which bank to select depending on the availability of a line of credit or not. (Tip: contact drew@smbootcamp.co for help with your SBA financing needs)
• Use it strategically. The quality of earnings provider will advise on the amount of cash to put on the balance sheet. And many readers may have thought of using it for new uniforms, a new website, or a new marketing campaign (the broker told you they’ve never marketed before, and it’s a huge growth opportunity). But that cash buffer isn’t there for major capital investments. It’s there so when the business is in a tight spot with the hidden costs of the transition, it will still able to make it through to the other side.
• Some transition costs are unavoidable. Even at the highest levels of mergers and acquisitions in private equity, big law, investment banking, etc. there are surprises and things that go wrong. Smart operators plan for them by having access to quick cash whether it be through a LoC or a family member invested in their success who can write an emergency check upon request.
• Lastly, it buys you time. Often it is the case that the business will get worse before it gets better. Cash on the balance sheet and a strong line of credit do exactly that. They mean owners can slow down, make thoughtful, long-term decisions for the Company, and avoid the desperate 90-day cash crunch that takes too many first-time buyers down.

Bottom line? If you’re squeezing every dollar to maximize post-close ownership, but leave yourself with no room for error, you’ve already made the first critical mistake. That doesn’t mean the deal has to be overcapitalized, but that does mean Buyers need to bring enough cash to the balance sheet and sign with a bank that will underwrite a line of credit.

Common Mistakes Buyers Make

• 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

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.

• 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).

Understanding Your Cash Conversion Cycle

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.