HELP for LOI: Working Capital and Accounts Receivable in Trade Company

searcher profile

April 22, 2024

by a searcher from United States Air Force Academy in Castle Rock, CO, USA

Hi all,

I'm working directly with the seller of a company and we're looking at 2.5x multiple on a sub-$1M EBITDA trades company, which is the fair market value for a company like this.

I submitted an LOI to the seller and he balked at the provisions for WC and AR, suggesting that we would need to increase price by $500K to cover those things.

I'm looking to chat with someone who has closed on a transaction like this, and who can shed light on how they worked through their negotiations on these issues. Also, how does the SBA consider these aspects when it comes to their inclusion in the price?

Thanks in advance,
David

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I always tell buyers if you are paying full price for a business you should expect it to come with the working capital necessary to operate the business. If you are getting the business for a discounted price, then you should expect to have to bring in working capital separately.

As for the SBA, you can certainly buy A/R as part of the loan and build working capital either into the loan or get a separate line of credit to support working capital. However, the cash flow has to work with this additional level of debt included. Also, when the business valuation is done, the SBA cannot lend you more than the value of the business for the portion of the debt associated with the business purchase. The firm evaluating the business is going to adjust the valuation based on the assets you are actually purchasing. So it will still need to value out.

Happy to have a discussion and look at the actual financials and let you know how much debt the business can support and go over potential structures. You can reach me here or directly at redacted Good luck.
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Reply by a searcher
from George Mason University in McLean, VA, USA
So under accrual accounting that works fine and dandy, but sub $1M price tag companies deal in cash accounting, so there is no AR and AP is paid monthly. I worked with a CPA and commercial lender friend to figure out how to word the working capital article in my LOI. Basically, in cash accounting, 'work in progress' and inventory and prepaid expenses are what I will be getting, because what I really want is to be able to get incoming cash flow in the following 2 months as my 'working capital'. If you are under accrual method, Sam Rosatti did a webinar and has a spreadsheet to calculate target working capital. Link is here: https://acquiringminds.co/webinars
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