If you want to avoid a million-dollar whammy and not leave millions on the table when selling, read on. In an episode of our M&A Talk podcast, my guest was involved in litigation around a $4m claim regarding working capital, and it’s clear the risks are easy to miss. As the seller, you may not know the actual purchase price until after the deal is done. Related-party itemsShort-term debtLines of creditTaxes payableĭid you know that having a firm grip on net working capital, how it’s calculated and negotiated as part of the process of selling your business, can potentially save you millions of dollars? Not only that, but nasty surprises often come in the form of a purchase price adjustment three months after the closing. Here’s a breakdown of the primary components of net working capital: Current AssetsĪccounts receivableInventory of finished goods, raw materials, or work-in-progressPetty cash (e.g., cash in registers required to operate a retail business)Prepaid expensesĬash and cash equivalentsMarketable securitiesĪccounts payable (e.g., supplier and vendor expenses)Accrued but unpaid expenses (e.g., payroll)Customer depositsDeferred revenue In a typical transaction, the purchase price doesn’t include cash, and the buyer doesn’t assume any debt. This means the seller keeps the cash in the business and must pay off any debt upon closing. In most M&A transactions, the target company is acquired on a cash-free, debt-free basis. Net Working Capital = Current Assets (excluding cash) minus Current Liabilities (excluding debt). And they don’t always assume all the current liabilities, such as lines of credit. It’s sometimes called “non-cash working capital.” Most M&A transactions include working capital in the purchase price, but buyers don’t necessarily require all the current assets to run the business, such as excess cash in the bank account. Net Working Capital: More common in M&A, net working capital (NWC) is equal to working capital, less any cash and debt in the business. Working Capital = Current Assets minus Current Liabilities. In other words, working capital is a measure of a company’s operating liquidity – or its ability to fund operations and meet its short-term obligations. ![]() Working Capital: A common accounting term, working capital is the difference between a company’s current assets and current liabilities, where current refers to a period of one year or less. For some sellers, this can amount to 20% or more of the purchase price. NWC may constitute a significant percent of the purchase price, and any mistakes you make in the calculation or when negotiating terms will have a material impact on your net proceeds. ![]() If your business requires a significant amount of working capital to operate, then you must understand net working capital before you sell. ![]() If you’re thinking of selling but not quite ready yet, browse our free resources.īy Jacob Orosz (President of Morgan & Westfield) Who Should Read This Article Morgan & Westfield has completed transactions in 100+ industries globally, representing business owners and buyers in North America, Central America, South America, Europe, and Asia. Whatever your business, we’ve got you covered. Morgan & Westfield sold in 100+ industries. Real stories from real clients who have sold their businesses through Morgan & Westfield. Morgan & Westfield offers transparent a-la-carte pricing-no hidden fees, no long-term contracts. Here are answers to some of our most commonly asked questions. Our goal is to help you successfully exit your business. Here are some of the people who make it happen. ![]() Morgan & Westfield is a leading M&A firm. At Morgan & Westfield, there are never any long-term contracts.
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