We have a revolving line of credit and several equipment loans that we use to manage our cash flow. How should we manage or clean up our company's debt profile during our three year exit runway?

Question

Tyler Smith · Accepted Answer

Your debt profile needs careful management on your exit runway because buyers view debt as a direct indicator of financial health and operational risk. First, understand that most transactions are structured on a debt-free, cash-free basis. This means you will be required to pay off all funded debt, including bank loans and lines of credit, from your sale proceeds at the closing table. To maximize your net proceeds, use your exit runway to systematically pay down high-interest liabilities and optimize your cash conversion cycle. Second, review your existing debt covenants. Some loan agreements contain change-of-control provisions or steep prepayment penalties that can complicate or delay a transaction. You must identify these clauses early and work with your lenders to renegotiate them or plan for their termination. Finally, analyze your reliance on your revolving line of credit. If your Scorecard shows that you are constantly drawing down on your line of credit to meet payroll or purchase inventory, a buyer will identify this as a working capital deficiency. Aim to reduce your reliance on short-term debt by improving your collections and inventory turnover. Showing a clean balance sheet with minimal short-term debt proves to a buyer that your cash flow is strong enough to sustain operations independently.