For Private Equity: when EBITDA hits plan but cash lags

the deck

Hitting plan, and paying more to convert it.

Adjusted EBITDA is on target, but working capital runs several million above the model, and the add-backs hold costs that seem less temporary each quarter.

The quarterly review comes two and a half years into the hold. Revenue is up and the value-creation plan is on track. The pricing program is into phase two, the system implementation is on schedule, and the new CRO has the commercial team performing. Service metrics are within range. The CEO has reasons for everything in the deck and the reasons are reasonable.

Underneath, cash from operations trails Adjusted EBITDA. Defensive stock and disputed receivables keep pushing working capital past what growth explains. Headcount in customer service and billing has run over budget for three quarters. The controller’s margin bridge names a different driver every quarter, and no explanation survives two consecutive periods.

The EBITDA bridge reaches plan through adjustments. Freight overruns and substitution losses are booked inside the initiatives’ adjustment lines as cutover stabilization or integration expense, each supported for its quarter and tied to something the company is already fixing. The cash was spent; the add-backs restore only the adjusted earnings. By the third quarter, they look less like transition costs than like the cost of running the business, and if they persist, a buyer’s quality-of-earnings work will read them that way.

Whatever it disallows comes off the earnings the exit multiple is applied to.

the plan

Four initiatives, all waiting on the same decisions.

Pricing, systems, leadership, and integration each report progress, while the account terms beneath them stay unsettled or never reach the records.

The pricing program is six months in, and its dashboards report the lift on the price file. Orders keep shipping under open job quotes, distributor protection periods, and special-pricing claims written at the old price, so realized margin has not moved, and nobody can say how much of the old price is still committed, or for how long.

The implementation is on its second consultancy, and the project reports configuration complete. The customer records default to prepaid freight, and the order-size thresholds that decide when a customer pays its own still sit in a side file. Unless someone adds the charge by hand, the invoice goes out without it. The carrier bills the shipment regardless: expense with no revenue against it.

The new CRO is eight months in. Pipeline discipline has tightened and forecasting is cleaner, but the winning quotes allow split shipments and waive freight minimums. Commission is paid on invoiced margin, which the system calculates as price less standard cost, so the cost of the waived freight and the second shipment never enters it. The reps are paid on margin the company did not keep.

Shared accounts ask one order desk for the lower price and the other for the looser freight terms. The add-on closed twelve months ago and the corporate consolidation is done, but the acquired lines still sell from their own price files and freight terms. The cross-selling margin in the synergy case is running the other way.

All four initiatives report on track against what they were asked to deliver. Each is waiting on an account term it does not own: one nobody has decided, or one decided and never carried into the records. Someone has to settle those terms with management.

Every quarter spent waiting for the nearest initiative to take them on comes off a hold that does not get longer.

the ledgers

Paid in earnings, in funding, and in the senior team’s week.

The costs land in three different places. At exit, a buyer prices sustainable profit at a multiple, then deducts the debt, including what was borrowed for the extra stock.

In earnings, unrecovered freight, substitutes, and service sit in the P&L as variances nobody assigns to the account that caused them. One accrual will not survive diligence: a supplier rebate accrued all year against a buying tier the purchases missed once the spot buys that kept customer dates went to other suppliers. When diligence tests the receivable against actual purchases, whatever has not already been reversed comes out of trailing earnings in one adjustment.

In funding, the defensive stock and the disputed invoice lines sit on the balance sheet, and the revolver carries them at a floating rate. Cash the plan counted on to pay down debt stays in the business, and borrowing capacity that could fund the next add-on finances the current order book. The stock cannot be cut just before the sale either. The buyer usually sets the working-capital target from the trailing year, so stock cut in the final months comes back as cash and goes out again as a lower price.

In the senior team’s week, the problems nobody below them can settle climb to the CEO and the CFO: a pricing hold, a disputed allocation, a close that runs late. They clear them in hours the plan assigned to integration and growth.

Whether each cost protects a requirement worth keeping or an arrangement that should change is a decision the records can inform and management has to make. Once it is made, the pricing program and the system can carry it.

the calendar

Nothing is waiting for a clean restart.

Every initiative is green in the last board update, and changing course now has a cost of its own, paid in credibility as much as money.

Those decisions have to be made inside a plan that already assumes the initiatives will deliver what the investment case needs.

The governance calendar is built around them. The CEO is accountable to the value-creation plan, the board has seen the same initiatives for several quarters, and the GP reports to its own investors on a rhythm the company does not control. The operating partner is reading this company alongside others, each with its own board cycle and its own version of the same pressure.

Reopening any initiative means explaining the last few board updates again. The commitments are rational, and unwinding them costs governance as well as project spend, so the initiatives report on track while the account terms go undecided. The company does not break. It takes more capital and more senior time to hold its shape.

The next board review is already on the calendar.

The work has to happen inside the plan as it stands: no pause in the run rate, no reset of the implementation timeline, no new program for the board to sponsor. This week’s orders still ship.

the mandate

I bring the open questions to decisions and carry them into use.

Inside the portfolio company, under the CEO’s authority and within limits management sets, while the business keeps shipping and the board calendar holds.

I take on the open account terms under an interim mandate or as a bounded project, and carry the decisions through while the company’s people keep the current business running. Where management wants them settled and its own team to carry them, the work is advisory.

The decisions are specific.

For an add-on: who owns the shared accounts, which terms survive, and whether the acquired lines will sell through the channel at all.

For a go-live: the pricing hierarchies and the route for exceptions, before the build applies them.

For an inventory target: which sites stop carrying stock, and how the dates quoted from them will hold.

Some accommodations are kept, some are priced, and some are stopped, and no change reaches an invoice before the customer has agreed to it or had the notice its terms require.

Management sets the limits and decides the trade-offs on the accounts that matter most. Within those limits I settle the rest, alongside the people who run the business. The record owners and the integrator make the data and system changes. The work is with management, not around it, and it is not the operating partner’s enforcement arm.

The next quote, transfer, and invoice show whether a decision holds. I stay through repeated use until it does, then hand it, with its records, to a named manager who keeps it current. Margin and cash are counted separately, and only when they show up in the costs, credits, receipts, and inventory funding.

In a portfolio, the loudest problem is not always the one worth the most. A visible dispute between a company and its integrator draws the board’s attention; a price file leaking across thousands of quiet orders draws none. I start with the value at stake, the time left in the hold, and the team’s capacity to carry a decision into use.

What the business still does for its customers, it now does on purpose and at a known cost.

the read

The most useful first conversation has a company in it.

It is about the gap between the plan and the cash, traced in the business’s own orders, credits, and stock rather than in the deck.

Write to consult@davelloandco.com. One conversation usually shows where the work belongs: with the company’s own team, with someone else, or with me. When it is mine, the scope is agreed with management.