Helen Lotte, Negosentro | While it plays an important part in the M&A process, your business’ working capital can easily become a point of conflict between buyer and seller.
Here, we explore why it can so often prove to be a complicated, contentious area, and provides you with strategies for negotiating working capital to your advantage.
Working Capital: What’s the Issue?
The working capital of your business is, quite simply, the cash that is available for its day to day operations. You can calculate this by taking away the company’s current liabilities from its current assets, and then using the resultant ratio to determine the operating liquidity available to you.
Working capital is an essential component in the day to day running of any business, but when it comes to the M&A process, it can quickly become a major point of contention between the buyer and seller. When a buyer is valuing a business, they will usually base that valuation on the company’s financial situation as it stands on a certain date. As the M&A process can be a lengthy and complex one, it is highly likely that your working capital levels will change due to a number of perfectly normal business factors – ranging from seasonal fluctuations to the addition of new products or services.
These fluctuations can lead to disagreements between buyer and seller over the eventual value of the business. Working capital stays with the business after it has been purchased, so a buyer will want to be certain that they are purchasing a business that, on the eventual date of sale, has enough working capital to be able to continue operating. Even if both parties begin the sale process in total agreement, by the end they can have different ideas of what the business is now worth.
How to Avoid the Pitfalls of Working Capital
By far the most efficient and convenient way of avoiding disputes over working capital is simply to ensure that both parties are in agreement from the very start of the M&A process. Decide early on how the working capital will be calculated, as there are a number of variations on the method of calculation.
Some businesses also choose to set an agreed amount of working capital from the start, based up the historical working capital levels of the business, and mutually agreed by both parties. No matter which method is decided upon between buyer and seller, a clear and unambiguous record of this decision should be made, to be referred back to at any point during the M&A process at which disputes may arise.
When preparing a business for sale, it is always important to ensure that you have the most accurate figures and company valuation available to you, in order to minimise the chances of disputes or disagreements arising. A business valuation calculator like the one offered by Pomanda is a simple way of valuing a business accurately and efficiently. Preparing yourself as fully and comprehensively as possible before setting out to sell your business is the most effective way of ensuring that both parties reach a satisfactory conclusion, and that your sale is completely free of complications.