What amount of working capital should be expected in an SDE multiple?

investor profile

February 20, 2025

by an investor from Purdue University - Krannert School of Management in Portland, OR, USA

I am looking at a business in the heavy construction industry with long cash cycles. I can make the numbers attractive at a 3X multiple but adding additional debt for the large amount of working capital required pushes it to an uncomfortable level. Should I expect that to be baked into the lower multiples? Or am I right to expect enough working capital to provide the expected SDE?

0
14
97
Replies
14
commentor profile
Reply by a searcher
from Loyola Marymount University in Portland, OR, USA
Hey Josh. Sounds like you’re in the thick of it—exciting! We faced a similar situation acquiring a construction-related business with surprisingly high WC needs. My general read of industry multiples on EBITDA/SDE is that they don’t consider the working capital needed to support business operations. I used these multiples as a starting point to build my model, then thought through the ongoing capex needs to determine free cash flow, and examined the deal through a “total project cost” lens, which included WC, before making our initial offer. Sounds like high WC is a reality of this business that needs to get sorted, so if the deal doesn’t pencil out from your side (based on your/your investor’s target return, DSCR, etc.), then it should be a negotiation point with the seller or pass. Eager to hear other’s perspectives.
commentor profile
Reply by an investor
from Michigan State University in Chicago, IL, USA
If the working capital for the business isn't included in the base purchase price, then yes you should include the working capital investment needed into your calculation on purchase price multiple.

For example, if the business is doing $500k in SDE a 3x multiple would be a purchase price of $1.5MM. However, if you aren't buying working capital and the business requires $250k in working capital then I would view it as buying the business for $1.75MM at a SDE multiple of 3.5x.

Hope that helps.
commentor profile
+12 more replies.
Join the discussion