(1/5) When completing my deal, the seller was very focused on keeping all working capital (i.e. AR less AP) at close. This required me borrow addt'l $$ to be added to the B/S to fund expenses until new AR began converting to cash #SMB #startup #Finance #business #Acquisitions
The challenge with this was twofold: 1) estimating WC in SMBs can be difficult, and a growing business in a post-pandemic environment makes it much more so. Therefore, borrowing a pre-determined amount vs. using a line of credit is very difficult and frankly risky
That said, my lender didn’t offer lines of credit, which left me with no choice. 2) Second challenge with seller keeping WC is the operational hassle of your new team receiving checks for old business and having to pass those on to the seller.
While this may seem simple, these old payments are often lumped in with new payments you are owed, which can drastically increase the confusion at a time when setting up new books is difficult enough.
If I were to re-do my acquisition process, I would have either fought much harder to buy the AR or I would have 100% chosen a lender who could provide a LOC. Picking a set amount of cash to borrow for WC adds unnecessary stress and takes your focus away from more important things

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More from @Adrian_Pinto2

5 Jan
(1/4) Looking at doing an add-on for which the owner won’t do seller fin (is buying RE with proceeds), and for which I prob can’t do SBA for couple reasons. Very complimentary revenues and strong rationale for deal, but also not without issues. #SMB #Finance
(2/4) True CF is quite a bit less than suggested given need to hire at least one role to backfill owner. So even if I could get comfortable with purchase price, not sure taking on more debt is best move for combined biz.
(3/4) That said, it feels too early in my ownership to give up substantial (or really any) equity. So I am curious if anyone is aware of creative & attractive comparables? I hear people have raised capital based on TEV instead of equity value, which would be interesting.
Read 4 tweets
5 Jan
(1/4) I think its important to remain financially disassociated from your business in a way post-close. If an employee comes to you with strategic rationale to spend $$, you don’t want to be blinded by the idea of limiting your quarterly dividend or lowering “your” cash
(2/4) You should evaluate whether that decision makes sense objectively. I understand people have different financial situations and goals with their businesses, but there is a reason why PE firms don’t view their PortCo’s cash balance as their personal piggy bank..
(3/4) (and yes, I know the GP’s don’t own majority %) But its because siphoning off cash is almost never the best way to improve magnitude of long-term returns (it only increases IRR). This doesn’t mean to be irresponsible or reckless, but thinking about a business’s…
Read 4 tweets

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