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Are You Securing the Cash Flow in Every Deal?
5 Key Deal Terms to Strengthen Cash Flow and Drive Success
David Burns
February 18, 2025
Hey, it’s David!
Closing a deal is just the beginning… what happens next often determines its true success.
Cash flow hiccups can quickly unravel even the most promising acquisitions, but the right deal terms can safeguard your liquidity and set you up for smooth post-close operations.
Here’s a breakdown of five critical terms that can make or break your cash flow strategy.
…Is Your Cash Flow Cleared for Landing?
Picture this: You’ve just touched down after closing a promising deal, but something feels off. Post-close cash flow isn’t aligning with your projections, and suddenly, small oversights in deal terms are costing you big time.
If that sounds familiar, you’re not alone. Even seasoned professionals occasionally miss key nuances that directly affect cash flow. Whether it’s working capital miscalculations or unclear post-closing adjustments, these “small” gaps can derail even the most promising acquisitions.
Here are 5 key deal terms worthwhile revisiting, both as a knowledge refresher and as a way to secure cash flow while improving deal outcomes:
1. Earnouts:
A portion of the purchase price contingent on post-sale performance targets.
Goal: Turn future results into cash-flow safety nets
Why It Matters | Cash Impact |
Earnouts bridge valuation gaps, minimizing upfront cash outlays while keeping sellers incentivized to deliver results. But poorly structured earnouts? They can create disputes that destroy trust and derail post-close synergies. | Earnouts protect your liquidity by tying cash payments to measurable outcomes; giving you confidence that you’re paying for results, not promises. |
2. Working Capital Cycles:
The time it takes to convert net current assets into cash.
Goal: Maximize cash flow and protect from seasonal impacts
Why It Matters | Cash Impact |
A short cycle shows efficient cash management, while a long one might signal hidden operational inefficiencies or seasonal fluctuations buyers often miss. | Misjudging working capital cycles can choke liquidity post-close, especially during periods of seasonal demand or supply chain disruptions. |
3. Debt Service Coverage Ratio (DSCR):
A measure of a company’s ability to cover debt obligations with operating income.
Goal: Avoid the post-close cash crunch
Why It Matters | Cash Impact: |
DSCR helps buyers gauge whether the company can sustain its debt - or take on more - without jeopardizing operations. Misjudging this ratio can quickly lead to cash flow crises. | A solid DSCR ensures your operating income supports both existing obligations and future growth without straining resources. |
4. Quality of Earnings (QoE):
An assessment of whether a company’s reported earnings are sustainable and repeatable.
Goal: Get the “truth” behind the numbers
Why It Matters | Cash Impact: |
A strong QoE inspires buyer confidence, while red flags, like one-off revenue spikes, can result in renegotiations or deal fallout. | QoE clarifies whether the earnings you’re acquiring will reliably generate cash flow or if hidden risks could erode future returns. |
5. Post-Closing Adjustments:
Adjustments based on pre-agreed metrics (i.e., working capital or net assets) assessed post-close.
Goal: Keep the final price aligned with reality
Why It Matters | Cash Impact: |
These adjustments ensure fairness, but poorly defined terms can lead to disputes and mistrust, draining time and resources. | Clear, well-negotiated terms prevent unexpected cash outflows post-close, protecting liquidity and ensuring deal value holds steady.
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Final Boarding Call: Cash Flow is the Lifeblood of Every Deal
No matter how experienced you are, revisiting these key terms can tighten your strategy and protect the cash flow that drives your success. Think of it as ensuring your deal lands smoothly… without turbulence from cash surprises.
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Thank you!
David