Working Capital: Bring or Buy it?

December 12, 2024

by a searcher in Boston, MA, USA

Hey all - curious to get people's thoughts on the best way approach securing working capital in a competitive deal process for a business doing <$1M in SDE.

There seems to be two schools of thought; push for a normalized level of WC to be included in the deal / purchase price OR skip the WC discussion with the seller altogether, pay a slightly lower multiple and include WC in your loan.

"Buying" WC: Allows you to offer the highest purchase price in your LOI, but can create confusion and conflict when trying to educate seller on the concept of WC

"Bringing" WC: Sellers see a slightly lower purchase price in your LOI, but you avoid leaving WC up for debate

Which route have you seen more success with? Does it ever make sense to present both options to the broker / seller and gauge which they'd be more keen on?

Reply by a lender
in Ponte Vedra Beach, FL 32082, USA

^redacted‌ I can share from a lender perspective. Most often I see WC being financed within the loan or brought by buyer. Depending on how WC is negotiated as being included in purchase agreement and how it can be ensured to be transferred at closing can be complex and difficult to manage at times while also causing valuation conflicts during due diligence phase prior to closing. Those complications tend to slow the closing process for the loan which tends to be a non-desirable result. I am happy to discuss in more detail and hope this mild insight is helpful. My cell is###-###-#### , email is redacted or you are welcome to schedule directly via my calendly: https://calendly.com/bturner-thebancorp/45min

Reply by a professional
from Georgia Southern University in Atlanta, GA, USA

Either works, but 1) ensure the LOI clearly defines whether it is or is not included, 2) ensure your model calculates the cost to bring it if thats the conclusion, and 3) if buying it, have a detailed discussion with the seller about what the approach means in practice. Use examples. The main instance it derails a deal is when it IS included and the seller or seller's advisors didn't understand what that actually means (i.e., the very standard "why would i leave you the AR for MY sales" response from a seller). Shifting models from buying it to bringing it can drastically change valuation and make the deal not pencil.

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