Anyone successfully negotiated working capital?

April 09, 2023

by a searcher from Columbia University in New York, NY, USA

I’m going back and forth on an LOI with the seller (asset sale). Seller obviously wants to deliver the business at “zero” (AP paid, all cash/AR goes to seller, and I have to pay for inventory). I am pushing back for them to leave working capital (assets minus liabilities) in the business. Any suggestions on how to convince a stubborn seller to budge?

1 Like

8 Replies

194 Views

Replies

Reply by a professional
from Villanova University in West Chester, PA, USA

Hi ^redacted‌, yes, there are a lot of great points above. I highly recommend negotiating it now rather than after you sign the LOI as it is a big value component. You could do a stock purchase, or share how including working capital benefits them. Depending on whether you have SBA financing, there may be an earnout or other note, and working capital will help support the ongoing strength and success of the business. Ultimately, it's a numbers game. So, it may require negotiating the purchase price or doing a working capital adjustment - so there is a certain amount of working capital expected in the business and depending on the working capital at closing, the purchase price may be adjusted up or down for daily fluctuations in the working capital amount based on the definition agreed upon by the parties. I've counseled many clients in this and would be happy to discuss this further.

Reply by a searcher
from Indian School of Business in Raleigh, NC, USA

For me, every deal was different. I found negotiating the working capital (overall) to be virtually impossible with unsophisticated sellers. So the next best thing is to break down the working capital and see which parts are more relevant, and focus on those. One business I looked at had huge deferred liabilities (they took large advances from the customer) so I just tried to negotiate that one item only. For another deal the inventory was very large/important, so I tried to at least negotiate that item. In case you are unable to adjust it, factor that into the overall cost of buying the business. For me this calculation was pretty straightforward because I am using an SBA loan. If I can service the loan, including adequate working capital where missing, then proceed. Otherwise walk. Live Oak Bank has some great educational sessions on calculating debt service coverage, once you master that it is like a superpower.

+6 more replies.

Join the discussion