A forecast built during diligence and the first real month of ownership rarely match exactly, and a small miss does not by itself mean the business was mispriced. What matters is diagnosing which kind of miss it is before deciding what, if anything, to change.
Key takeaways
A buyer who compares raw month-two bank-account cash flow to a forecast built from the seller’s normalized earnings is not making an apples-to-apples comparison, and the gap that shows up in month two is often an artifact of that mismatch rather than a real operating problem. The first useful question is not “why did the number come in low” — it is “does the number still miss once it is adjusted the same way the forecast was.”
Deavo’s own description of how a forecast’s earnings base is usually built is the place to start. Seller’s discretionary earnings “starts from a business’s pre-tax profit and adds back interest, one owner’s compensation and benefits, and discretionary or non-recurring expenses the current owner ran through the business” — it is meant to show “total cash flow available to a single owner-operator who works full time.” (deavo.ai/insights/sde-vs-ebitda…) A forecast built on that basis effectively assumes somebody runs the business for whatever the departing owner happened to draw, which is often little or nothing formal. The month a new operator, or a hired manager, starts drawing a real market-rate wage, that wage stops being cash available to the buyer — even though nothing about the underlying operations has changed at all. Re-running the actual month-two number with the same wage add-back the forecast used, rather than comparing raw cash to raw cash, is the first and cheapest diagnostic step.
The same source’s own red-flag list for reading financials cuts both ways here. “One-time/non-recurring items such as a lawsuit settlement or a one-off equipment sale” are exactly the kind of thing that should already have been backed out of the seller’s historical numbers before the forecast was built — but a new one-time cost that shows up on the buyer’s side of the ledger in month two (a point-of-sale migration, a first WSIB registration payment, a signage change) can just as easily explain part of a miss without saying anything about the ongoing business at all. (deavo.ai/insights/reading-financial-statements-before-you-buy)
Once the add-back and one-time adjustments are stripped out and a genuine gap remains, the next test is whether it moves a number a lender actually watches. Deavo’s own published debt-service coverage targets for the financing bands this hub uses are “≥ 1.25× on SDE” at the smaller end of the market and “≥ 1.30× on EBITDA” for larger deals. (deavo.ai/financing) A real run-rate miss large enough to threaten that ratio belongs in a call to the lender before it shows up on a covenant-compliance certificate, not after.
It is worth being precise about what a CSBFP guarantee actually is at this point, because a buyer under pressure sometimes assumes it buys more flexibility than it does. The programme is a loss-sharing arrangement, not a government line of credit: the Canada Small Business Financing Act caps the Minister’s liability at “the lesser of… 85%… of its eligible loss” per loan, with the lender’s own aggregate recovery further capped by loan size under s. 9(2). (Canada Small Business Financing Act, ss. 8–9) The lender, not Ottawa, decides whether a covenant miss is a problem, and the lender is carrying real uncovered risk on the loan — which is exactly why an early, voluntary call reads very differently to a lender than a missed payment discovered on their own monitoring.
If the miss turns out to be real rather than a timing artifact, the working-capital room built into CSBFP financing is narrower than the headline number suggests. ISED’s own programme page states a term loan can carry “a maximum of $150,000… for intangible assets and working capital costs” inside the overall $1,000,000 term-loan limit, and separately “up to a maximum of $150,000 for lines of credit.” (ISED, CSBFP programme page) A 2022 programme bulletin confirms that line-of-credit ceiling sits “over and above” the term loan’s own working-capital allotment. (ISED, 2022 changes bulletin) Both figures are fixed ceilings set when the loan closed, not something a buyer can renegotiate upward mid-year because month two came in soft. If the facility was not sized with headroom at closing, month two is the wrong time to discover that.
A confirmed timing miss changes sequencing, not strategy: a discretionary line item in the 100-day plan can move a month without touching payroll, supplier terms or anything a lender would notice. A confirmed run-rate miss is a different kind of problem — it is a diligence-quality question, and the honest response is to isolate exactly which forecast assumption was wrong (a customer that quietly did not renew, a margin that was never really there once normalized correctly) before deciding whether the 100-day plan, or the deal thesis underneath it, needs to change.
A buyer forecast $31,000 in month-two net cash contribution for a business bought at $2.1 million, carrying the seller’s SDE-basis figures into the model. Actual month-two net cash came in at $22,400 — an $8,600 miss, large enough to look alarming taken on its own. Working through it in the order above: the new operator began drawing a market-rate management wage of $6,500 a month starting in month two, an amount that had been an SDE add-back under the prior owner, who had taken no formal salary. That accounts for $6,500 of the gap. A one-time point-of-sale system migration cost $2,100 and will not repeat. $6,500 + $2,100 = $8,600 — the entire miss is explained by two adjustments that should have been anticipated when the forecast was built, not by a drop in the underlying business. Nothing here moves the DSCR test, and nothing here changes the 100-day plan beyond noting that the wage line is now a permanent cost rather than a forecasting assumption.
Related: writing a plan you can actually execute, the guide on writing a hundred-day plan for a new acquisition, and the case file on a locked-box deal where cash flow turned negative in month two.
Not automatically, and not on the programme’s own terms. The loss-sharing guarantee in the Canada Small Business Financing Act sets how Ottawa and the lender split a loss if one occurs, but it says nothing about when a lender calls a covenant breach. That timing, and any cure period, is set in the individual loan agreement with the lender rather than the federal Act, so the loan documents are what to check, not the programme rules.
Not under the programme as published. ISED’s own limit is a flat “maximum of $150,000 for lines of credit,” separate from and in addition to the term loan’s own $150,000 working-capital allotment — both are ceilings fixed at the time the loan is set up, and there is no stated mechanism inside the CSBFP for raising them mid-term because of an operating shortfall.
A short call is enough to separate a forecasting artifact from a real operating problem, and to know which one you’re looking at.
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