Top 5 things to know about working capital in SMB deals

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September 12, 2023

by a professional from Vanderbilt University in Austin, TX, USA

Working capital can be a sticking point in negotiations for a small business acquisition.

For today's SMB post, here are the top 5 things you need to know about the role of working capital and how to avoid key pitfalls while buying a business:



1) Working capital is the difference between a company’s current assets and its current liabilities. It impacts a company's ability to sustain operations, invest in short term capital needs, and grow. A healthy operating capital ratio is generally between 1.2 and 2.0.



2) It can be a confusing part of a small business negotiation - for buyers, sufficient WC is needed to ensure the business can operate. For sellers, the need to provide WC may seem counterintuitive ("why do I need fund WC for operations? That's the buyer's responsibility now")



3) Understand how different components, such as receivables, payables, and inventory, factor into the deal. Distinguishing between short-term working capital needs and long-term requirements is key. Sellers are unlikely to agree to fund longer-term capital requirements.



4) There are a few ways to calculate needed WC:

    - Historical assessment: based on past patterns and needs

In a disagreement, deal participants can use lines of credit instead of including WC in the deal



5) A few key tips to ensure proper WC management as you negotiate an #smb deal:

To see more about this topic, check out our recent article about it: https://privatemarketlabs.com/the-role-of-working-capital-in-successful-small-business-acquisitions/

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commentor profile
Reply by a searcher
from University of Southern California in Charlotte, NC, USA
Working Capital discussion in a deal is extremely important. It's a negotiation point in every deal. I always frame it that you wouldn't sell a car without fuel. WC is the fuel that you need from day one to drive you new business off of the lot.
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Reply by a searcher
in Vancouver, BC, Canada
Are most LOIs on a "debt free, cash free" basis? If so, presumably the WC peg would not include cash, and use other assets / liabilities?
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+3 more replies.
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