The first hundred days, and the covenants nobody mentioned

The period the whole deal is tested in

Completion is the end of the transaction and the beginning of the thing the transaction was for. Everything asserted in the forecast, that the customers stay, that the staff stay, that the work can be delivered without the previous owner, is tested in the first quarter, and the debt starts being repaid immediately regardless of how the test goes.

It is also the period where new owners most commonly do the wrong thing, for understandable reasons. Having spent months negotiating and paying for diligence, the temptation is to arrive and start improving. Nearly every experienced buyer says the same thing about their first acquisition: they changed too much, too early.

What follows is not a management manual. It is the part of the first quarter that touches the funding, because a business can trade perfectly well and still create a problem with its lender in the first ninety days.

Retention comes before improvement

The value you paid for is customers and staff, and both are more likely to leave in the first months than at any other time. Nothing else matters as much until that has settled.

Staff first, on day one. Before the customers, before the suppliers, before anything. In service businesses the engineers, technicians and qualified seniors are the delivery mechanism for the revenue that was bought. They have been through a period of rumour, they are wondering about their jobs, and the person who used to answer that question has just left with the money. Being told directly, on the first morning, by the new owner, in person, is worth more than any communication plan.

Customers next, and in order. The largest and the longest-standing first, and ideally introduced by the seller rather than announced by the buyer. What customers want to hear is that the service and the person who turns up are not changing. What alarms them is a new owner opening with a plan.

Nothing that looks like a change, for a while. No new pricing, no rebrand, no restructure, no system migration. Every one of those gives a customer a reason to reconsider, and they can all wait a quarter. The exception is anything that was broken and was part of the reason for buying, where waiting has its own cost.

Where the seller is staying on for a handover, this is what that period is for. Using it properly means having the introductions diarised before completion, not intending to arrange them afterwards, which is the point made in succession and retirement sales.

Where the cash actually goes

The most common financial surprise in the first quarter is not a fall in revenue. It is the cash cycle, and it catches buyers who funded the purchase carefully and then treated working capital as an afterthought.

The pattern is consistent. Salaries are paid on the normal date, in full, from the first month. Suppliers who were relaxed with the previous owner sometimes tighten terms for a new one, or ask for payment up front until a record exists. Customers pay on their usual cycle, which in contracting and facilities work can be a long one, and some of them use the change of ownership as a reason to review an invoice. Meanwhile the first loan repayment falls due, and the professional fees from the transaction land.

A business that is trading exactly to forecast can be short of cash in month three purely from that sequence. It is entirely predictable and it is what working capital exists to cover, which is why the facility belongs in the funding package agreed before completion rather than requested afterwards. A lender asked for a working capital line in month three is being asked for money by a borrower whose forecast has already proved wrong, which is a different conversation from the one available in month minus two.

Worked exampleTake a business with a monthly payroll and customers who settle on sixty-day terms. In month one the new owner pays a full payroll and collects almost nothing, because the invoices raised that month are not yet due. In month two, the same. Cash starts arriving in month three, by which point three payrolls, the first loan repayment and the legal fees have all been paid. The business is performing exactly as forecast and it is at its lowest point of the year. These figures are invented to show the shape of the cycle.

The reporting your lender is watching

Every acquisition facility carries information covenants, and they are the least dramatic and most consequential thing in the document. They typically require management accounts on a stated timetable, annual accounts within a set period, and sometimes a covenant compliance certificate confirming the cover tests have been met.

Missing the first one is remarkably common, because the new owner is busy running a business they have just bought. It is also the cheapest possible way to lose a lender's confidence. From the lender's side, a borrower who cannot produce management accounts three months after completion looks like a borrower who does not know how the business is performing, and that impression is expensive to reverse.

The financial covenants themselves, usually a debt service cover test and a limit on total borrowing against earnings, are tested less often but matter more. The mechanics are set out in senior term debt. What is worth knowing on day one is exactly when the first test falls, what it measures, and how much headroom there is, because that is the number that decides whether a slow quarter is an inconvenience or a breach.

If it goes off plan, say so early

Some acquisitions underperform in the first quarter. A large customer leaves. A key person resigns. A contract is not renewed. None of these is necessarily fatal, and how the lender finds out determines what happens next.

A borrower who explains the position early, with a revised forecast and a plan, is a borrower managing a business. The same borrower discovered at the next covenant test, having said nothing, is a borrower with a credibility problem as well as a trading problem, and lenders respond very differently to the two.

Where a covenant is genuinely going to be breached, a waiver or a reset is often available. It is much more often available before the breach than after.

Integration, if there is one

Where the buyer already trades, the first quarter carries an extra job, and it is the one most likely to damage the platform business. Two payrolls, two sets of systems, two ways of pricing and two cultures, with the owner's attention split. The cost savings that were in the forecast usually depend on integration steps that take longer than anyone plans.

The sensible order is to stabilise the acquired business first and integrate second, even where that defers a saving. A bolt-on that damages the existing company has cost more than it bought, which is the point made in bolt-on acquisitions. In route-based businesses such as pest control, where the saving comes from combining rounds, that integration is the whole reason for the deal and it still repays being done in stages.

What to measure, and against what

The forecast given to the lender is the benchmark, and tracking against it weekly in the first quarter is worth more than any monthly report. The things worth watching are narrow.

• Customer retention by value, not by count. The two diverge exactly when the largest customers are the ones leaving.
• Cash collected against cash forecast, weekly.
• Staff retention among the people who deliver the work.
• Contract renewals falling due in the first six months, and their status.
• Anything the seller used to do personally that has not yet been replaced.

What goes wrong

The buyer arrived with a plan. Changes in the first weeks give customers and staff a reason to reconsider a decision they had not been thinking about.

Working capital was not funded. The most predictable problem in the whole process, and the easiest to prevent at the term sheet stage.

The first management accounts were late. Small breach, disproportionate consequence.

The seller disengaged early. A handover that exists on paper and not in practice, usually because it was never scheduled.

Nobody looked at the deferred payment dates. The first instalment to the seller can fall in the same quarter as the working capital trough, and it is a fixed obligation.

Looking further out

Once the business has settled and there is a trading record under new ownership, the funding that was right for buying it is often not the funding that is right for running it. Acquisition facilities are priced for acquisition risk, and a business that has performed for a year or two is a different proposition. That is the conversation covered in refinance, and it is worth having deliberately rather than when a facility matures.

What has to be settled before any of this, on the day itself, is in completion.

We know this market and the people who fund these deals, including which lenders fund the working capital alongside the purchase rather than leaving a buyer to discover the gap. Tell us what the business needs to trade from day one, and we come back to you having spoken to them.

We introduce buyers who are acquiring through a limited company or a NewCo. If you are buying personally, as a sole trader or as a partnership, we will point you to an authorised firm directly instead.