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

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?
from Loyola Marymount University in Portland, OR, USA
from Michigan State University in Chicago, IL, USA
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.