Why Working Capital cash forms part of a Business Sale

working capital

EXCLUSIVE: NAI Business Series with Alf Sanderson*, VP Business Advisory

Why Working Capital cash forms part of a Business Sale

Selling a business implies that the business is being sold as a going concern.  Businesses that are a going concern must have sufficient working capital and liquidity.  Working capital pays for short-term obligations such as accounts payable, payroll rent, buying inventory etc.

Working capital is an important part of any company’s assets and is the lifeblood that allows a business to operate.  Whether a transaction is an asset or share sale, working capital is almost always included in any valuation and sale and must be delivered upon closing. Should a business seller not wish to include working capital in the sale of a business, the Buyer will have to immediately inject sufficient working capital into the business, which will adversely affect the sale price.

The sale price of almost all businesses over a two-million-dollar valuation includes working capital:  current assets less current liabilities. Buyers want to know they are getting enough working capital to continue operations and not run into liquidity problems.

Although cash is part of working capital, it requires special treatment because the owner controls the amount of cash. For example, the owner may choose to leave excess cash to defer paying personal taxes. In fact, many businesses have significantly more cash than the “normal” amount needed.

It is natural when a business sells for an owner to believe that the working capital is theirs.  Working capital needs to be viewed as a company asset, the same as a piece of equipment used in the company’s operations.

As working capital fluctuates constantly, a mechanism to adjust post-closing is typically included in the definitive agreement so that an owner knows how much working capital was included in a sale, and a buyer knows how much working capital they will have to allow for ongoing operations of the business they paid to acquire.

Because of this, working capital becomes a key point of negotiations, as is structuring a company properly prior to sale to allocate a proper amount of working capital to the business and removal of excess and redundant assets.

Every business is unique, and a business broker can help you review and determine what may be a reasonable amount of working capital to sell with your business.

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Written by Alf Sanderson*

NAI Commercial
Vice President Business Broker, Mergers and Acquisitions Consultant
604 691 6646
[email protected]
*Personal Real Estate Corporation

Alf has over forty years of industry experience, building and operating businesses, taking companies public and assisting firms in coordinating and selling their businesses. Contact Alf with your questions regarding the disposition of your business.

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