How does payroll funding work for a staffing agency’s cash flow after purchase?

The central issue is timing. Workers expect to be paid on schedule whether or not the client has paid yet, so payroll comes out of the agency’s pocket first. The faster the agency grows, the more cash it needs to carry in the meantime.

Ask the seller to show how payroll was funded in a recent busy month. Was it paid from the company’s own cash, a bank line of credit, or an arrangement where an outside party advances money against client invoices? If it is the last, ask who the arrangement is with, how it is secured and whether it transfers to a new owner, since your lender and lawyer will want to read it.

Look at client payment habits as well. A handful of slow-paying clients can stretch the gap and strain your cash right after you take over, when you also have purchase financing to service. Ask for an aged list of unpaid invoices and compare it with the cash-flow forecast for the coming year. Finally, ask your accountant how the cash-based and accrual views of the books differ for this business, so you know the real cash position on closing day.

Key takeaways

• Ask how payroll was funded during a recent busy month, not just an average one.
• Find out whether any invoice-based funding arrangement transfers to you on closing.
• Review aged unpaid invoices by client before forecasting your own cash needs.