Closing on a Seasonal Business in the offseason
October 28, 2024
by a searcher in New York, NY, USA
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?
from Bentley College in Miami, FL, USA
Seller-Financed Working Capital Buffer:
Since the working capital left in the business might not cover the anticipated burn from January to March, negotiate for a seller-financed working capital buffer or a deferred payment on a portion of the purchase price, which can act as a reserve to cover offseason cash flow needs. This buffer would ideally be drawn upon if needed, rather than rolled into the overall working capital.
Holdback for Offseason Cash Flow Support:
Consider structuring a “holdback” agreement where a portion of the purchase price is held in escrow and released once the business enters its revenue-generating months (April). This way, you have a reserve if the offseason cash flow is more challenging than expected. If everything goes well, the seller still receives this holdback at the end of the offseason period.
Seasonal Adjustment Clause in Working Capital Calculation:
Often, working capital negotiations base themselves on annual averages, which may not account for seasonal needs. You could negotiate a “seasonal adjustment” clause in the working capital calculation, adding extra working capital specifically for the offseason months. This adjustment ensures you have the necessary liquidity to bridge through March without relying on an annualized figure.
Additional Line of Credit or Revolver for Seasonality:
Another route is securing a line of credit or revolving credit facility before closing, tailored for the offseason. This would give you flexibility to cover cash flow needs during the early months and only draw on it if needed. If you can negotiate with the seller to cover some of the loan’s initial interest (either directly or as a purchase price adjustment), this can further mitigate your early cash outflows.
Structured Seller Note Payments or Deferred Payments:
You could negotiate to structure any seller note payments so they begin after April when revenue picks up, or to defer part of the purchase price to pay out during the peak season. This gives you breathing room during the offseason while aligning cash flow with the business’s revenue cycle.
Earnout Based on Offseason Performance:
Another creative approach could be an earnout structured on revenue or profitability metrics specific to the offseason, motivating the seller to set realistic cash flow expectations. The earnout would only kick in if the business’s offseason cash flows are strong, giving you some insurance if the offseason performance underwhelms.
from The University of Texas at Austin in Austin, TX, USA
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.