Closing on a Seasonal Business in the offseason

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by a searcher
in New York, NY, USA

1yr ago

Closing on a Seasonal Business in the offseason

I am currently under LOI with a fairly seasonal business that makes most of their revenue during the April-October period and has some negative cash flow months from November-March.

Under the current timeline, we will likely get to closing in January. Given the seasonal nature of the business, this would put us in a position where the first few months of ownership may be cash flow negative. The quantum is TBD as we worth through the quality of earnings to better understand the monthly cash flow.

We have negotiated that a normalized level of working capital will be left in the business but I sense this will not cover the burn over the first few months under ownership (Jan-March). Are there any pre-closing negotiating levers I might be able to pull to help us get through this period? Other than just trying to draw out the closing process?

Does anyone have experience and/or thoughts on how to navigate this dilemma?

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reply by a searcher 1yr ago
from Bowling Green State University in Surrey, BC, Canada

Focus in on working capital - a 'normal' level would need to be sufficient to get through the trough.
Calculating working capital for a hyper-seasonal business takes a bit more work. Not only will you (possibly) be burning cash on SG&A, you may also need to build inventory and pay suppliers. Hear that sucking sound? - it's cash leaving the business
If you're not a finance type, engage a good accountant to help.

reply by a professional 1yr ago
from The University of Texas at Austin in Austin, TX, USA

Option one: The working capital amount should be specific to when you will own the business.

Option two: You have the option of sign the purchase agreement now and change the closing date to busy season, but that brings a new risk.
The seller already knows that the business is about to be sold and there's very little motivation to maintain business quality, especially with internal operations that you'll find out about post-closing.

Option 3 & etc: could you work out a deferral of certain payments to the seller to provide you additional working Capital from the loan or increase the working capital that's associated with the loan or the seller provide you with a working capital loan that's due in 12 to 24 months? This is the part where you might be able to get creative depending on the specific business about different ways to help you manage cash flow.

I highly suggest you create a 13 week cash flow forecast. Most people don't and that first quarter post is gonna be a shit show and it will definitely save you time, money and stress to have a plan and then update the plan every week.

DM me if you want details.