EBITDA Said It Works. The Cashflow Proved It Doesn’t – Real Deal Analysis ***
There is clearly more to deal making that just numbers on a spreadsheet but I wanted in this article to use the analysis of a real deal that on a spreadsheet stacked up but under real analysis was broken. It is a mistake many inexperienced buyers make – confusing EBITDA for Cash. Lets dive right in: I recently looked at a deal in the UK it’s a £50M Engineering Company. Gross margins have remained stable 26% in 2023, 27% in 2024 and 28% in 2025 and Operating Profits have fluctuated from £1.7m in 2023 to 2.6m in 2025. With depreciation EBITDA is £3m up from £2m the year before, down from £3.5m the year before that. If I took a blended average of £2.8m EBITDA over the three years, multiple by 3 (typical multiples for Engineering SMEs 2.5-3x) and then add the balance sheet of £7.6M to it I get a total deal of £16M. Then from a funding perspective I could raise around £8M at closing using invoice finance so essentially pay 50% upfront, and 50% on a deferred basis. EBITDA currently of £3.2m the debt servicing would be around £1M to the lender and £1.6M to the seller (seller note, £8M over 5 years) total debt servicing £2.6M coverage: 1.23 – just about in the realms of affordability. It’s a bit tight if you factor in Capex at £200k and Tax at around £600k, that brings it down to 0.9 which is not acceptable but with some financial re-engineering you could release around £750k in cash and £200k in profit so it would work. But I just wanted to share some analysis that the spreadsheet doesn’t tell you. On paper, this looks like a perfectly financeable deal. £3.2m of EBITDA, £2.6m of total debt servicing, and a coverage ratio of 1.23x. Tight, but within range. With some working capital optimisation, you might convince yourself this works. The reality is very different. When you go beyond EBITDA and actually look at the cashflow, the whole picture changes. The business only generated around £1.0m of operating cash in the most recent year. That’s not a small variance – that’s a fundamental disconnect between profit and cash. You’re not levering £3.2m of earnings, you’re levering just over £1m of real cash generation.