Buyers expect target companies to have a “normal” level of net working capital (Receivables + Inventory + Prepaids – Payables) upon closing a business acquisition.
Many times, we find privately held companies build and retain excess working capital, and, because buyers often point to historical levels in making the case for what is “normal,” buyers are able to negotiate higher than necessary closing working capital targets. So, if you contemplate selling your business, it is wise to start thinking about working capital two or more years before your expected exit date. By taking the effort to effectively manage working capital, you can lower a buyer’s working capital expectations while also freeing up cash for distribution – in each case, helping maximize the value you receive.
This post was written by George Thomas.