Working Capital = short-term assets - short-term liabilities
Short-term assets: cash, accounts receivable, and inventory that will be converted into cash within twelve months.
Short liabilities: accounts payable, salaries, taxes, and other debts/accrued expenses.
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Seven Reasons Why a Buyer May Expect Working Capital to be Included in the Sale Price of a Business - Business Brokers of Florida
Here is a brief summary of the key points:
Working capital is the money available to meet current, short-term obligations.
Lower-middle-market valuations include working capital in the price.
Main street business valuations do not include working capital in the price.
More lower-middle-market buyers are reaching down into main street businesses and are thereby expecting working capital to be included in the price.
Here are seven reasons why a buyer may expect working capital to be included:
- Ensures Business Continuity
- Creates Seamless Transition
- Avoids Additional Investments
- Mitigates Risk
- Simplifies Negotiations
- Avoids Disputes
- Simplifies Handing of A/R and A/P
The inclusion of working capital in the sale price should be clearly defined in the purchase agreement; specifically, the methodology for calculating the working capital amount, any adjustments, and the target working capital amount at the time of the sale.
For more tips on selling or buying businesses, contact Eric J. Gall at [email protected] or 239.738.6227.
