- Category: Business Survival Toolkit
- Published on 01 October 2015
- Hits: 494
By: Olivier Barbeau – regular contributor
In the final part of this series on selling your business, we look at understanding the impact of working capital
Working capital can drastically impact your sale proceeds. Walk away with more by understanding how. My final article focuses on the role of working capital in the sales process – a topic I mentioned briefly in Part 1 of this series.
Working capital needs vary from business to business and there is no standard definition. But in general terms, working capital is the capital that is tied up to fund your day-to-day operations. The amount required usually increases in line with your business’s size.
While most business owners recognise that good working capital management can optimise cash flow and alleviate funding pressures, many fail to understand the critical role of working capital when they sell.
How does it affect your transaction price?
Buyers and sellers typically have different ideas about how much working capital should remain in the business.
Buyers want to ensure there is sufficient working capital to trade without having to inject any cash, so they prefer a generous amount. Sellers prefer to minimise working capital because they will pocket more of the sale proceeds.
In the sale run-up, sellers can, and do, manipulate working capital accounts to favour them. A way to increase certainty and avoid arguments is for both sides to negotiate a target working capital amount that is mutually acceptable. The amount is documented in the sale agreement, along with what is included and excluded in working capital calculations.
Given the length of the sales process and normal business fluctuations, the level of working capital at hand over time often differs from the agreed amount, so the base price is adjusted up or down.
The amount at stake can be significant. However, the amount is only known after the sale agreement has been signed so it’s too late to negotiate or turn back. Take the time now to understand how the working capital adjustment mechanism is calculated so you can negotiate it in your favour.