Model EBITDA, free cash flow, working capital requirements, debt capacity, and the equity check to close the deal.
| Metric | What it means | Benchmark |
|---|---|---|
| EBITDA Margin | Operating cash generation before capex and debt service | 10–18% for light mfg |
| Capex Intensity | Maintenance capex as % of revenue — the "toll" on FCF | 3–6% for light mfg; higher for process mfg |
| Cash Conversion Cycle | AR days + Inventory days − AP days | <60 days is healthy; >90 days is a cash trap |
| NWC % of Revenue | Working capital relative to scale — higher = more cash needed to grow | 10–20% for most mfg businesses |
| DSCR | FCF ÷ Annual debt service — lenders want >1.25x | >1.25x to finance; >1.5x comfortable |
| EV / EBITDA | Purchase price multiple — the market price of the business | 4–7x for light mfg; higher for recurring revenue |
Manufacturing businesses often have significant working capital requirements baked into their balance sheets. When you acquire the business, you typically acquire the working capital with it — but the price negotiation often centers on EBITDA multiples, not NWC. Make sure the LOI specifies a working capital target and a peg mechanism, or you may end up funding a working capital shortfall out of pocket post-close.
Use the Working Capital Cycle calculator to model this in detail, including the cash implications of growing the business post-acquisition.
SBA 7(a) loans are commonly used for small manufacturing acquisitions. The rule of thumb for debt sizing is 3–4x unlevered FCF, with lenders targeting 1.25x+ DSCR on an annual basis. If your deal doesn't clear 1.25x DSCR at your assumed debt load, expect lenders to either reduce the loan amount or ask for additional collateral.
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 manufacturing, normalize maintenance capex, owner engineering time, overtime, tooling, warranty claims, and inventory reserves.
The right drivers depend on the business model. For this category, pay close attention to gross margin by product line, machine utilization, scrap, labor efficiency, backlog quality, customer concentration, and capex requirements. 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 obsolete equipment, customer concentration, undocumented processes, supplier dependence, environmental exposure, or margins that depend on underpaid owner labor. 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.