Marketer acquisitions and mergers are happening at an almost frantic pace these days. If you are in the midst of buying another marketer, or contemplating a future purchase, it’s wise to consider the cash flow management after the acquisition. While many marketers focus on the initial purchase price and terms, cash flow (or lack of it!) can come as a big surprise if you’re not careful. Here are the things to think about:
1) Inventory. Does the purchase price include inventory? If not, you will need to come up with those extra dollars on day one. Most lenders will finance your opening inventory if asked to do so.
2) Receivables. Does the purchase include receivables? If yes, and you have secured long term financing, you are on the positive side of the cash flow curve since you’ll likely collect those receivables in no more than 30 to 45 days and have received typically ten or more year financing.
Be sure, however, that you have made a provision for uncollectible accounts in your purchase agreement. A typical solution is an escrow fund set-up as a contingency for uncollectibles. At the 90-day mark, the buyer is refunded any non-collected amounts and the burden of collection goes back to the seller.
On the other hand, if you purchase a wholesale business without purchasing the receivables, you’ll have almost twenty days of sales and fuel costs eating up your first month’s cash before you begin collecting! On a $30 million annual revenue company acquisition, this means over $1.5 million in negative cash flow the first month taking into account typical ten-day supplier terms. Make sure your credit line has a high enough limit to handle the working capital requirement of your acquisition.
3) Unplanned repairs. No matter how thorough your due diligence, we’ve yet to see an acquisition where there wasn’t some unplanned repair or maintenance expense in the first few months. In many instances, its cheaper to buy an item new than to fool with repairs. If you start paying for long term assets likes trucks, remodels, etc., out of cash, you will quickly be out of cash.
The best solution is to increase your capital purchases line. (This assumes you have a capital purchase line which every marketer should so you don’t use your working capital line up for asset purchases or run out of cash!) If you are absorbing the new company into your present corporation, simply ask for an increase of you line.
If your acquisition will be in a separate corporation, you should request a new line of credit from your bank. This line will allow you to draw funds as needed for your capital expenditures, similar to a working capital line. At the end of your physical year, however, the principal balance will be termed out into a regular loan over an appropriate number of years depending upon what was purchased with the proceeds.
4) Unplanned personnel expense. Invariably, melding two organizations takes much more manpower than anyone can imagine. Even though you may eventually reduce the payroll of both companies in the long-term, you will pay dearly in the short-term. Figure your payroll costs to jump by 25% in the first three months for both companies.
5) Legal fees. Both before and directly after the acquisition, you will likely spend more money on attorney fees than you ever thought reasonable. Every dime you spend on a competent attorney, however, is a dime well-spent to keep you out of trouble and reduce your risk.
6) Lease costs. Many unsuspecting buyers have found themselves in two disheartening positions. The first is having to pre-pay a seller’s existing leases because transfer of ownership is prohibited. This can get extremely costly on a fleet of trucks! The second is a situation where rents can be changed (read that increased) with change in ownership or assumption of lease. This is why you should spend money on an attorney to review all existing contracts.
7) Surprise debts. This onerous situation occurs when you structure the transaction as a stock purchase rather than an asset purchase. You are now on the hook for any liabilities such as back taxes, unrecorded debts, etc. Again, a good attorney will help you minimize these costs with contingency language in your purchase agreement. Contingencies can be covered via an escrow or future installment sale payment reductions if the owner carries a note in conjunction with the sale.
In summary, the moral to the story is that cash flow requirements don’t end on the day of purchase, they begin! Make sure you have the cash and/or credit available to cover these common contingencies.