Working Capital Adjustments
In most business sales, the "Enterprise Value" assumes a "normal" level of working capital is included in the sale. Understanding how this is calculated is vital for both buyers and sellers to avoid last-minute price disputes.
What's Included?
- • Accounts Receivable: Money owed by customers.
- • Inventory: Raw materials and finished goods at cost.
- • Prepaid Expenses: Rent, insurance, or deposits.
- • Accounts Payable: (Subtracted) Money owed to vendors.
The "Target" Working Capital
Parties negotiate a "Target" based on the average working capital over the last 12 months. If the actual working capital at closing is higher, the purchase price increases; if lower, it decreases.
Why It Matters
A seller shouldn't "strip" the business of cash and inventory before closing, and a buyer shouldn't have to inject immediate cash just to keep the doors open. The adjustment ensures the business is delivered in a "business as usual" state.
Financial Due Diligence Advisory
Calculating "normalized" working capital requires expert accounting knowledge. We work with your financial team to ensure the target is fair and the closing adjustment is accurate.