When selling a business, the Net Working Capital requirement can have a big impact on the sale price. Steps must be taken to carefully define the Net Working Capital requirement of a business.
The higher the Net Working Capital target, the lower the goodwill component of the sale price, so it is in the seller’s best interest to justify the lowest Net Working Capital target.
Experienced buyers can often make valuable adjustments from unsuspecting business owners without being called out. Unfortunately, many lawyers and accountants do not appreciate the significance of this and may overlook how important this calculation is, which can cost the seller money.
A widely-adopted method to derive the Net Working Capital target is to take the month-end balances for a period, usually the last 12 months.
Month end balances often include two months’ trade debtors balances, being the current month invoices and the prior month’s invoices waiting payment at the end of the month. This often inflates the average, which benefits the buyers and hurts the seller.
It also restricts the window to close the transaction to a month-end. Otherwise, a mid-month calculation would more than likely produce a lower balance than the target, resulting in the seller having to cover the shortfall relative to the target.
Divest Merge Acquire goes to extra lengths to calculate the average based on daily balances for the past 12 months. Not only does this produce a balance that is usually lower than the month-end peaks, but it allows flexibility to be able to close the transaction at any time during a month.
Many clients have benefited from this practice. It is one of the many ways Divest Merge Acquire adds extra value for its clients.
