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Featured Insight


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Ben T. Nicholson

  • LinkedIn

At a Glance

When businesses, particularly small businesses, face distress, they will use various, and sometimes precarious, tactics to hold on to cash and triage disbursements.

Some of the tactics they will use can fly under the radar of outside stakeholders or parties interested in purchasing the business who do not realize their investment has been primed or the cash flow is distorted.

It is better to know what signs to look out for to get ahead of future issues that compromise the business.

The economic volatility small businesses are experiencing is quickly becoming an abject lesson in didactics vs heuristics – in school, you learn a lesson and then take a test; in the real world, you are tested and then learn a lesson. Some of the lessons are getting harsh and causing businesses to scramble to hold onto cash, and outside stakeholders and potential acquirers may not only be unaware of the measures being taken to do so but also the potential negative impacts that can surface later as cash flow and EBITDA earnings get distorted.

As mentioned in a previous note, the three things that get a small business into trouble are recessions, fraud, and stupidity. As the Fed continues to increase interest rates and tighten liquidity, which is not stopping no matter how much someone tries to will it so, it should come as no surprise if all three crop up simultaneously, and unexpectedly. To maintain a belief that there is no distress, be it in a lender’s portfolio, a professional advisor's client list or an M&A advisor’s business listings is either because the distress has not surfaced yet, someone is not looking hard enough in the analysis and due diligence, or heads are buried in the sand. There may not be a lot of it, but there is likely some in there somewhere.

According to the recently published chart above, 44% of small-to-medium-sized enterprises (SMEs) have over $100,000 in debt with the average being roughly $195,000. With interest rates for some loans roughly doubling, this could translate into an over 18% increase in debt payments without enough cash to cover. When you look deep enough, you may be surprised to discover the maneuvers businesses will make to conserve cash and triage disbursements. Just because someone is getting paid does not mean everyone is. And while instinct may dictate that, “as long as my bill gets paid, everything is fine,” upon closer examination it may be discovered that those payments are about to stop, and worse, unbeknownst to the stakeholders, a shuffling line is forming for a cut of the recovery from the assets.

When cash flow isn’t increasing from productivity, consider sources where cash may be coming from:

  • Delayed payments to smaller creditors

  • Unpaid payroll taxes

  • Unpaid sales taxes

  • Slower payments to key vendors showing up in stretched Days Payables Outstanding

  • Customer deposits allocated to debt service

  • Delayed seller finance payments with a seller threatening action to take the business back

  • Increased insurance deductibles to lower payments, or canceling some insurance altogether

  • Home Equity Line of Credit (HELOC)

  • Merchant Cash Advance loans which prime other lenders (possession is 9/10 of the law)

  • Increased Credit Card balances with payments showing up in Accounts Payable

  • Automobile title loans

  • Owners not taking a pay cut in order to maintain a lifestyle


Entrepreneurs and small business owners are often painfully unaware of their own propensity for self-deception. They work emotionally and rarely with financial logic. And unfortunately, the season when everyone finds out what they were wrong about is slowly surfacing.  

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