Anonymised, illustrative composite. The deal closed with cash on the balance sheet. Six weeks later it was gone, and the fix was a facility the buyer had structured for exactly this and never expected to need so soon.
At a glance
A platform company closed a bolt-on acquisition of a small contract manufacturer using a locked-box completion mechanism: the purchase price was fixed as of a reference balance sheet date, and the buyer took the business as-is from that date forward, cash included. At close, the business held $60,000 in its operating account — enough, on paper, to cover a normal month of payroll and supplier terms.
A locked-box deal has a structural feature buyers sometimes underweight: because the price is fixed as of the reference date, any cash the business burns between that date and closing, or in the weeks immediately after, is the buyer’s problem, not a purchase-price adjustment. Nothing in the deal accounted for the one-time costs of actually becoming the new owner — rebranding invoices and signage, a catch-up HST remittance the seller had deferred to closing, and a batch of seller-negotiated supplier payables that came due in the first full month under new ownership.
Month one closed close to flat: operating cash generation covered operating costs, ending cash at roughly $70,000. Month two brought the one-time transition costs due all at once — transition and rebranding costs, the deferred HST catch-up, and the seller-negotiated payables coming due totalled $150,000 in outflows against $65,000 of operating cash generation for the month, a net cash outflow of $85,000. Cumulative cash went from $70,000 to negative $15,000 before the month was out.
The Canada Small Business Financing Program is structured as two facilities, not one, and ISED states the ceiling plainly: “The maximum loan amount a borrower can access under this program is $1.15 million, which includes a maximum of $1 million for term loans and $150,000 for lines of credit.” The line of credit genuinely is additional. The term loan’s own sub-limits, by contrast, nest — they do not stack, and reading them as additive is the single most common way this programme is mis-modelled. The programme’s 2022-changes bulletin sets it out: “$1 million for term loans of which a maximum of $500,000 includes: equipment and leasehold improvements loans… and $150,000 for intangible assets and working capital costs. Plus $150,000 for lines of credit for working capital costs (which is over and above the $150,000 that can be used for working capital costs under the term loan product).” In other words the $500,000 is a ceiling on everything that is not real property — equipment, leaseholds, intangibles and working capital together — with the $150,000 intangibles-and-working-capital allowance sitting inside it rather than beside it.
Two further limits on the line mattered to this buyer. It may be drawn only for working-capital costs, and the bulletin’s list of those is specific: inventory, software and website development, printed materials, professional fees, research and development, payroll and rent. Fixed signage is not on that list. And the line is capped on price as well as on amount — prime plus 5%, a 2% registration fee on the authorized amount, a 1.25% annual administration fee on the outstanding balance, and a maximum five-year term before it must be re-registered, converted or refinanced. The buyer had arranged the $150,000 line at acquisition close specifically as a transition-cost cushion, without expecting to draw on it inside the first two months.
The buyer drew $90,000 on the line of credit, well within its $150,000 ceiling, bringing cash from negative $15,000 back to a $75,000 operating buffer — enough to clear the month and rebuild a normal cushion over the following quarter as the one-time costs rolled off. The interest cost on the draw was modest against the alternative, which was a scramble for emergency short-term financing at far worse terms, or delaying supplier payments and damaging relationships in a business the buyer had just spent months earning trust with.
Retaining the operating knowledge to manage that kind of week-to-week cash pressure matters even more when the person who understands it best is threatening to leave — see the manager who wanted to leave in week three. For how the deal’s own numbers get tested before a purchase price is even agreed, see the rebate cheque that inflated gross margin.
Without the line of credit already in place, the buyer’s options in week two of a cash shortfall would have been thin: a rushed short-term facility arranged under pressure, typically at a materially higher rate than the CSBFP’s capped pricing, or delaying supplier and payroll obligations in a business whose goodwill with both groups the buyer had not yet had time to build. Either path costs more than the interest on a $90,000 draw — the first in cash, the second in the kind of early trust that is hard to rebuild once spent.
There is a second, quieter cost to arranging the facility only after the shortfall appears: a lender asked to underwrite a working-capital line while the borrower is already visibly short of cash prices that risk into the facility, if it approves the request at all. Arranging the line at closing, while the balance sheet still looks the way the acquisition model assumed it would, is what kept the $90,000 draw a formality rather than a negotiation.
The tell sits in the deal structure, not the target’s operations: a locked-box completion transfers cash-timing risk to the buyer from the reference date forward, and a buyer who has not separately budgeted for one-time transition costs — rebranding, deferred remittances, payables timed to change hands — is implicitly assuming the target’s existing cash cushion was sized for business-as-usual, not for an ownership change. It rarely is.
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