Working Capital Negotiation with Small Business Owner

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by a searcher from University of Virginia-Darden - Darden School of Business
in Charlottesville, VA, USA

3yrs ago

Working Capital Negotiation with Small Business Owner

The working capital portion of the negotiation has always been a hurdle when talking with small business owners because it's typically their first time going through a business sale (and if there is a broker, they're not always helpfulredactedThe most recent situation has been challenging. At first, the seller wanted to retain the AR balance at close or be paid for it in excess of my offer. After I explained the rationale for it being a part of the business purchase, we negotiate the working capital peg that would be used to measure against at close. Making things a bit more complicated is a recent price increase that is pushing AR up on an LTM basis (I'm conceding on a higher peg because this increase should benefit me on a run rate basis).

All this being said, I'd love to hear how others approach this step in the negotiation. How early do you tackle it, and is there a tried and true way to make it a smooth discussion with an understandably unsophisticated small business owner?

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reply by an intermediary 3yrs ago
from St. Vincent College in Pittsburgh, PA, USA

Working capital is such a sensitive subject amongst sellers. Buyers generally expect it in a turn-key operation, but sellers feel that since the main components of working capital were earned (AR) or bought (inv) under their ownership it should be theirs. In my humble opinion how it is handled impacts the deal's value, just like many other structural components of the deal (e.g. earnouts and seller notes are not the equivalent of cash at close), and it should be considered accordingly when evaluating the offer. The sooner both parties get out in front of the issue the better.

reply by a searcher 2yrs ago
from Miami University of Ohio in Indianapolis, IN, USA

I have had a couple deals fall through because of this very reason - I think one of the most important parts when negotiating this is letting the standard come from a third party rather than the buyer (seller often views it as the buyer wanting their cake and eating it too)