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.

Once you factor in tax and true maintenance capex, the actual free cashflow drops even further. You’re likely left with somewhere in the region of £300k–£500k of sustainable cash before any debt servicing. Against £2.6m of annual obligations, the coverage isn’t 1.23x – it’s sub-0.5x. In other words, it doesn’t work.

The key issue here is working capital. This is an engineering business supplying large construction clients, which means it has to fund production, labour and materials well in advance of getting paid. As the business grows, it consumes cash. In the latest year, debtors increased materially and stock levels also rose, resulting in a significant cash outflow tied up in working capital movements . Growth here doesn’t release cash – it absorbs it.

That’s where a lot of deals fall down. On a spreadsheet, you can assume you’ll “optimise working capital” and release £500k–£750k. In reality, in businesses like this, working capital is structural. If anything, you need to put more cash in to support growth, not take it out.

There are also structural risks that don’t show up in a simple EBITDA multiple. Customer concentration is a good example. One customer represents roughly 25% of revenue and the top ten account for over 60% . There are no long term contracts in place. You’re effectively levering a business where a small number of counterparties drive the majority of cashflow, which any lender will heavily haircut.

Then there’s the balance sheet itself. Adding “£8m of net assets” to your valuation sounds logical, but most of that sits in stock and receivables. That’s not surplus value – that’s the working capital required to run the business. You’re effectively paying for it in the purchase price and then refinancing it with debt just to keep the lights on.

Even capex is often misunderstood. The accounts show relatively modest spend in year, but depreciation is materially higher, which is usually a better proxy for true maintenance capex in an engineering environment. Underestimating that quietly erodes your already thin coverage.

So when you step back and look at the deal properly, the conclusion is clear. This isn’t a 3x EBITDA deal with leverage supporting 50% of the price. It’s a cashflow constrained business that probably only supports £3m–£4m of debt, not £8m. Which means either the price comes down, the structure changes significantly, or the deal simply doesn’t work.

The lesson is simple, but it’s one I see missed time and time again:

EBITDA is not cash.

Net assets are not free value.

And growth, in the wrong type of business, can actually make things worse.

The spreadsheet might tell you it works. The cashflow will tell you the truth.

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