Working capital calculations

Lots of great insight in this thread. Working capital is one of the most challenging aspects of a deal. From a purely philosophical perspective, there is a huge hurdle for most seller's to overcome as they see the AR as money they earned and where inventory is in play that those are their goods. At a minimum, seller's want to get paid for those assets if they don't get to retain them. Meanwhile, a buyer is expecting to get a turnkey business and needs that AR and inventory for the business to operate as it has historically done so, and most, but not all, multiples assume the inclusion of working capital as an asset to be conveyed to the buyer regardless of whether or not it is a stock or asset purchase (per se on normalized level with amounts above or below impacting the purchase price on a dollar-for-dollar adjustment). Another factor to consider is how the working capital is calculated. Book/accounting working capital definition is different than in the M&A world. To continue to add to the difficulties is that two businesses in the exact same space can have significantly different working capital structures due to payor mix (i.e., days sales outstanding), inventory methods, payroll process, vacation policy, AP policies, etc. I could make the argument that even historical, normalized working capital may not be the right working capital target. For instance, there are many entrepreneurs that are "debt adverse" and pay any bill within a couple days that it is received rather than use the normal payment terms to their advantage thereby inflating working capital. There are many other instances where working capital as it is represented historically may not be a great representation as it should be "pegged" for the transaction.

difficult to answer your question without knowing more details such as: industry, business size, etc...