Model the working capital intensity, cash conversion cycle, and the real cost of funding growth in a distribution or wholesale business.
Distribution businesses typically have thin gross margins (15–30%) and significant working capital requirements — inventory sitting in a warehouse and receivables owed by customers are both cash tied up that isn't earning a return. The cash conversion cycle tells you exactly how long a dollar is trapped in the business before it comes back as collected revenue.
When you acquire a distribution business, you're buying the working capital along with the business. And when you grow it, every dollar of new revenue requires new working capital to support it — this is the hidden cost of growth that catches buyers off guard. The "Cash to Fund Growth" figure above shows you what you need to budget.
| Metric | What it means | Benchmark |
|---|---|---|
| Gross Margin | Revenue minus cost of goods — the margin on product | 15–30% for distribution |
| Cash Conversion Cycle | Days inventory + AR days − AP days | <45 days is efficient; >75 days is cash-hungry |
| NWC % Revenue | Working capital as a share of revenue | 10–18% typical; lower = more cash-efficient |
| EBITDA Margin | Net operating profitability | 5–12% for distribution |
| Inventory Turns | 365 ÷ Inventory Days | 8–15x/yr for distribution |
Always negotiate a working capital target ("peg") in the LOI. The peg should be set at normalized levels based on trailing 12-month averages, not a balance sheet date that the seller can manipulate by pulling forward receivables or delaying payables before close.
Use the Working Capital Cycle calculator to establish what normalized NWC should look like, and use that as your peg negotiation anchor.
An editable Excel workbook — 5-year income statement, balance sheet, cash flow, DCF + exit-multiple valuation, and a deal tab with debt schedule, IRR & MOIC. Pre-filled with the inputs above; every assumption recalculates.
A good acquisition model connects operating drivers to cash flow, debt capacity, and the price you can afford. Use this guide with the calculator to move from a seller story to a buyer-grade view of risk and return.
Seller numbers often include owner choices, one-time costs, unusual salaries, and expenses that may or may not continue after closing. Normalize earnings before applying a multiple, then document each add-back so the lender, investor, or seller can challenge it clearly.
For distribution, normalize obsolete inventory, freight recovery, rebates, customer credits, bad debt, and vendor rebates that may not transfer.
The right drivers depend on the business model. For this category, pay close attention to gross margin, inventory turns, vendor terms, receivable days, fill rate, route density, and customer retention. Small changes in those assumptions can move cash flow more than the headline revenue number suggests.
Use the calculator as a first pass, then pressure-test downside cases. A deal that only works in the base case usually needs a lower price, more seller financing, or a more conservative debt structure.
Most buyers focus on price and ignore the cash needed on day one. Inventory, receivables, deposits, payroll timing, and vendor terms can make a profitable business feel cash poor after closing.
Debt capacity should be based on durable free cash flow after owner replacement cost, taxes, capital spending, and working capital needs. If the debt service coverage ratio is thin, the deal may require more equity even if the multiple looks reasonable.
Before you issue an LOI, look for slow-moving inventory, weak vendor agreements, customer concentration, low gross margins, receivable quality issues, and working capital that grows faster than sales. These do not automatically kill a deal, but they should change the diligence plan and the structure of the offer.
The safest offers tie price to evidence. Use seller notes, earnouts, holdbacks, working-capital pegs, and closing conditions when the risk is real but still measurable.
Use recent comparable deals only as a starting point. The right multiple depends on durability, owner dependence, growth, margin quality, customer concentration, and how much debt the business can safely support.
Earnings and free cash flow matter most for most small acquisitions. Revenue multiples can help in software, content, and high-growth models, but they still need to reconcile to profit and cash conversion.
A buyer normally expects enough normalized working capital to operate the business without an immediate cash injection. Calculate it from historical monthly balances, not just the latest balance sheet.
Walk when the seller cannot support revenue, margins, add-backs, customer quality, or working capital with evidence. A deal that depends on trust instead of records deserves a lower price or no bid.