We are entering a two year exit runway and want to know how much working capital we need to maintain to absorb diligence costs without starving our core growth engine. How do we calculate our financial runway so we do not run out of cash before closing the deal?

Question

Tyler Smith · Accepted Answer

Preparing for an exit is incredibly expensive, both in terms of direct advisory fees and indirect operational focus. If you do not manage your working capital carefully, you risk running out of cash just as negotiations peak. This vulnerability will force you to accept a deeply discounted offer.

To protect your business, you must calculate your Time to Starve, which is the exact number of months your business can survive if your cash generation halts or drops significantly.

First, build a separate budget for your transaction expenses, including investment bankers, specialized M and A attorneys, and quality of earnings auditors. These costs are often front-loaded and can easily run into hundreds of thousands of dollars before a deal closes. Do not mix these expenses with your normal operating budget.

Second, maintain a robust cash reserve that is entirely separate from your operational working capital. You should aim to have at least six months of normal operating expenses in cash, plus your projected transaction fees.

Use your weekly Level 10 Meeting to monitor your cash position on your Scorecard. If your cash reserves drop below your targets, you must instantly adjust your operational priorities. Do not starve your sales and marketing engines to fund deal costs, as any dip in revenue during diligence will give the buyer a reason to renegotiate the purchase price. Run a conservative balance sheet so you can walk away from a bad deal.