You Financed the Price. Nobody Financed the Working Capital.
Every acquisition model has a line for the purchase price and a line for the debt. The cash the business consumes after closing day is usually not a line at all.
Take an illustrative case. A buyer acquires a distributor doing $20 million of revenue and $2 million of EBITDA for $12 million, cash-free and debt-free. An acquisition term facility at three times EBITDA advances $6 million. The model says buyer equity is $12 million less $6 million, or $6 million.
The purchase agreement also sets a working capital peg at $2.4 million, the trailing twelve-month average. If working capital at closing lands above the peg, the buyer pays the excess in cash. If it lands below, the price comes down by the shortfall.
What the model does not carry is that this business is seasonal. Net working capital runs about $2.0 million at its low point in February and about $3.2 million at its August peak.
The true-up is not the problem
Close in February, with working capital at $2.05 million. The buyer is $350,000 below the peg, so the price falls by $350,000 and the buyer wires $5.65 million rather than $6 million. That reads as a win at the closing table.
By August the business needs $3.2 million of working capital to operate. Getting there from $2.05 million is a build of $1.15 million, in cash, over six months. Net of the $350,000 received, the buyer has funded $800,000 it never modeled.
Now close in August instead, at the $3.2 million peak. The buyer is $800,000 above the peg and pays $800,000 at close. But the business is already funded, so there is no build. The buyer has funded $800,000.
Close exactly at the peg. No true-up, and a build of $800,000 to reach peak. The buyer has funded $800,000.
The number is peak minus peg
Three closing dates, three completely different experiences at the closing table, one identical answer. That is not a coincidence in the example. It is arithmetic: what the buyer funds is the peak working capital requirement less the peg, and neither of those terms contains the closing date.
The peg is an average. The business runs on its peak. The difference between the two is buyer cash, always, and the true-up decides only whether it arrives as a discount in month one or a bill in month six.
Closing at the trough is therefore the most dangerous version. It presents as a $350,000 saving, and the $1.15 million build arrives later, quietly, as a series of ordinary funding requirements that never get connected back to the transaction.
Why the acquisition facility does not cover it
Because the two facilities answer different questions. An acquisition term facility is sized against EBITDA and funds a purchase price. A working capital build is not an earnings event, it is an asset accumulation: receivables and inventory growing on the balance sheet.
Lenders fund that against the assets themselves, through a revolver with a borrowing base. It is a different instrument, usually a different credit approval, and sometimes a different source entirely. A buyer who arranges the term facility and stops has financed the acquisition and not the company.
The build is close to self-financing, if the facility exists
The collateral makes the problem tractable. What the buyer is funding is receivables and inventory, and receivables and inventory are exactly what a revolver advances against. The thing being financed is the thing that secures the loan.
In the same example, at the February trough the business holds $1.55 million of receivables and $900,000 of inventory. At the August peak it holds $2.4 million and $1.4 million. At advance rates of 85 percent against eligible receivables and 60 percent against inventory, availability grows from roughly $1.86 million to roughly $2.88 million across those six months.
Availability grows about $1.02 million against a build of $1.15 million. The revolver does not cover all of it, because advance rates sit below 100 percent and payables grow too. It covers close to nine tenths. The buyer funds around $128,000 from its own cash instead of $1.15 million.
The catch is timing. A revolver put in place at closing is underwritten against the acquired business as part of the transaction. A revolver sought in month five is a fresh credit application from a buyer who is visibly short of cash, which is a materially worse conversation.
How Thalos Capital Approaches This
Thalos Capital works borrower-side on acquisition and strategic debt from $50 thousand to $100 million and above, and the practical work here is refusing to treat the purchase price as the financing question.
Before a deal closes that means reading the peg against the seasonal range rather than against the average, sizing peak requirement minus peg as a real cash number, and arranging the asset-based line alongside the term facility so both are underwritten on the same transaction, against the same diligence, at the same time.
A buyer who does that arrives at closing knowing the total cash the first year requires. A buyer who does not has an accurate model of the purchase and an incomplete one of the business, and finds the difference somewhere around month five, when the options are narrower and the story is harder to tell.
Most financing situations have more options than the borrower initially sees. A conversation is enough to map them. Submit your financing request at https://thaloscapital.com/contact.