Most first-time buyers underwrite profit, while the smart ones underwrite cash flow.
But almost nobody underwrites the float, which is where good deals quietly explode.
In the first part of my recent cash flow series, I talked about the clash of two clocks, where your debt and overhead are fixed, but your cash inflows are variable.
When you zoom in on the rhythm of cash moving through a business, the “minimum viable month” can end up mattering more than your annual average of earnings.
But the float is an entirely different timing trap. And just like the two clocks, it has nothing to do with revenue or gross margins. It’s the gap between when you pay your vendors and when your customers pay you.
If you don’t underwrite it correctly, you can bleed six figures of cash in your first year — while the P&L keeps insisting everything is fine.
I’ve seen this play out dozens of times. Buyers get blindsided and look like they’ve been hit by a truck.
And having bought eight companies and invested in two dozen more, I’ve felt that punch myself.
I’ve made the mistakes. I’ve watched others make them. And I’ve spent almost two decades figuring out how to help buyers avoid them.
The Three Lenses of Cash Flow
When most people look at a P&L, or even a recast P&L, they see operating cash flow. Gross margin minus operating expenses. Addbacks. Seller discretionary earnings.
That’s useful. But it’s not enough.
Because you also have to look at working capital. And that’s where three numbers come into play:
- DSO (Days Sales Outstanding): how many days customers take to pay you.
- DPO (Days Payable Outstanding): how many days you take to pay vendors.
- DIO (Days Inventory Outstanding): how long inventory sits before it turns back into cash.
Together, these three determine the float.
Source: Analyst Prep
And this is where good deals go to die.
Every 10 days of DSO at a $5 million business equals roughly $137,000 stuck in receivables. That’s $137,000 in cash you don’t have, even though the P&L says you earned it.
Let me say it differently: you can be “profitable” and still go broke if you miss the float.
A Real Example
Years ago, I looked at a distribution company doing about $6 million in revenue. Profit margins looked fine. Debt service looked fine. The seller swore up and down that “cash flow is strong.”
But when I dug in, I saw DSO at 52 days. DPO was 30. That means they were paying suppliers three weeks before customers were paying them. And the business had to carry seven figures of receivables at any given time.
Who was floating that cash? The owner.
And if I bought it, that owner was going to be me.
That’s what I mean when I say you become the bank.
Building the Float Into Your Deal
So what do you do about it?
The first step is to recognize that working capital is not free. It has to be funded by someone. And in small business acquisitions, it’s usually you.
In middle-market deals, you’ll often see something called a “net working capital peg.”
Source: Corporate Finance Institute
That’s just a fancy way of saying the buyer doesn’t want to buy a car without gas in the tank. The seller has to leave enough working capital at closing so you can drive off the lot without stalling.
In smaller, SBA-backed deals, that rarely happens. Deals are typically “debt-free, cash-free.” Which means you walk in, take over the keys, and guess who has to cover the float?
Exactly.
That’s why I like to close with one to two months of fixed operating expenses plus one month of debt service in cash. Think of it as a buffer.
Could you get a line of credit after closing? Maybe. But in the first 12 months, don’t count on it. And don’t underwrite as if you will. Because the last thing you want is to feel underwater right out of the gate because you’re drawing down your LOC just to cover payroll.
The Easiest Way to Buy 10 Extra Days of Cash
Here’s the part everyone perks up for.
The fastest way to improve your debt service coverage ratio isn’t to sell more. It’s terms arbitrage.
- Negotiate with vendors: ask for an extra 10–15 days.
- Tighten up customers: collect five to 10 days faster.
- On big orders: require deposits and milestone payments.
Those tweaks alone can buy you 10 extra days of cash inside your first 90 days.
Show that math to your banker when you’re raising capital. It demonstrates that you don’t just understand the P&L – you understand the rhythm of cash in the business. And that makes you a stronger borrower.
Source: Stampli
Customer Concentration and the Float
One last pro tip. If any single customer represents 10% or more of revenue, look hard at how fast they pay.
I once evaluated a company where the biggest customer was 25% of revenue and a chronic 60-day payer to boot. At $5 million in revenue, every 10 days was $137,000 in receivables. Multiply that by six, and you’re floating over $800,000 for just one customer.
When I see that, I discount valuation by 5–10%. Because that cash isn’t real until it’s in the bank. And you will have to finance the float.
Sales won’t kill you. Terms will.
War Story: When I Ignored the Float
I’ll be honest. The first time I bought a business, I didn’t fully appreciate this.
It was a manufacturing company with lumpy receivables. Some months customers paid in 30 days. Other months, it stretched to 60. I thought, “No problem, I’ll smooth it out with growth.”
Wrong.
Source: Corporate Financial Institute
In month four, I had payroll, debt service, and inventory purchases all due. Receivables were late. And I spent a week on the phone chasing down customers, sweating bullets, wondering if I’d just made the biggest mistake of my life.
I pulled through, but only because I had a supportive banker and a seller note on standby. Not every buyer is that lucky.
That’s why I hammer this point so hard now.
The Hidden Traps After Closing
Even if you solve for the two clocks, and even if you solve for the float, there are still hidden traps waiting after closing.
- Month 25 Snapback. That’s when seller notes come off standby and hit your debt schedule. If you haven’t grown revenue and margins, your debt-service coverage ratio (DSCR) just dropped.
- Seasonality. Looks fine on a spreadsheet. But when you hit your slowest month in real life, it leaves you sweating payroll.
These are the stress tests I run before I ever close on a deal.
What This Means for You
Here’s the bottom line. You can’t just underwrite profit. You have to underwrite the float.
Because if your customers take 60 days to pay and your vendors want cash in 30, you’re effectively loaning your business six figures of working capital.
And if you don’t plan for it, that six figures comes straight out of your pocket.
How to Get It Right
So what should you do?
- Map DSO, DPO, and DIO on every deal you look at.
- Quantify the dollars tied up in receivables, payables, and inventory.
- Negotiate terms arbitrage in your first 90 days.
- Build in cash buffers of at least two months of fixed expenses plus one month of debt service.
- Discount valuation when customer concentration and slow payments combine.
Do that, and you’re already ahead of 90% of buyers.
Ready to acquire a business in the next 12 months? The Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.
