By Trent Lee — The CEO’s Sage

Part 8 of the Eight Drivers of Company Value Series

At some point in every deal conversation, the focus shifts from value to cash. Not revenue. Not profit. Cash. Because buyers don’t just buy your business. They fund it. And that’s where the Teeter Totter Principle comes into play.

The Two-Check Reality

There’s a concept I often share with clients that tends to stop people in their tracks: A buyer has to write two checks. The first is for the value of the business. The second is for the capital required to run it. Most owners focus entirely on the first number. But from a buyer’s perspective, both matter equally. If someone pays $5 million for your business but needs another $2 million just to fund inventory, receivables, or day-to-day operations, they’re really making a $7 million investment. That changes the math. And it changes the valuation.

Cash Suck vs. Cash Spigot

At its core, the Teeter Totter Principle asks a simple question: Does your business generate cash… or consume it?

Some businesses require significant upfront investment just to operate. Think of a distribution company that needs to purchase large amounts of inventory before it can sell anything. That’s a capital-heavy model a cash suck.

On the other side, you have businesses that can operate with minimal capital. A small construction company, for example, may rent equipment instead of buying it outright, keeping capital requirements low and flexibility high. One business requires fuel just to move. The other starts generating cash much sooner. That difference matters a lot.

Understanding Your “Fuel Tank”

Working capital is essentially the fuel that keeps your business running. You can buy the car, but you still need gas to drive it. The question is: How big is your tank, and how fast do you burn through it?

This is why we often walk clients through a working capital exercise, looking back over one to two years to determine how much capital is consistently tied up in the business. Accounts receivable, accounts payable, and inventory all play a role in this equation.

When you understand your working capital requirements, you can answer key questions:

•How much cash does the business need each month to operate?

•How quickly does that capital turn back into usable cash?

•Is that number trending up or down over time?

Without this clarity, both buyers and sellers are guessing. And guessing introduces risk.

Where This Shows Up in Deals

This is one of the most overlooked areas in transactions—especially internal sales or first-time acquisitions.

Everything centers around the value of the business. But late in the process, the realization hits: the buyer also needs to fund working capital. That’s when deals get strained.

Because what looked like a $5 million purchase suddenly requires significantly more cash to operate. And if that expectation isn’t clear upfront, it creates friction, delays, or worse—failed transactions.

Certainty around working capital removes that friction. It creates alignment between buyer and seller and allows both sides to move forward with confidence.

How Other Drivers Influence This One

This is where the drivers start to connect.

Recurring revenue, for example, can significantly improve your position on the teeter totter. Predictable cash inflows reduce the need for large working capital reserves. Operational efficiency, pricing power, and even customer diversification all influence how much cash your business consumes or produces.

These drivers don’t operate in isolation. They compound.

Final Thought

The Teeter Totter Principle isn’t just about cash. It’s about efficiency, predictability, and risk.

Businesses that require less capital to operate—and turn that capital quickly—are more attractive, easier to finance, and ultimately more valuable. Because in the end, buyers aren’t just asking, “What does this business earn?”

They’re asking, “How much cash does it take to keep it running?” Answer that clearly, and you reduce risk. Reduce risk, and you increase value.

________________________________________

About the Author

Trent Lee helps business owners escape founder dependency and scale sustainable companies using the Value Builder System and strategic execution coaching.

Want to know how your business scores on the 8 key drivers of value compared to your peers?

👉 Get a free assessment at www.compassleadershipadvisors.com

or connect on LinkedIn: https://www.linkedin.com/in/trentrlee/