Working Capital PEG

by a searcher from The University of Chicago - Booth School of Business

3 years ago

Hi All,
I recently put in a LOI with seller who verbally accepted to the terms but once it came time to put pen to paper backed out.  Issue was with working capital target.  I basically said that during diligence we would get a more clear understanding of net working capital required and then set a target for close based on historical needs.  The seller wanted to provide me A/R on a loan that would be paid back over the course of a year.  I dont have a PE background but always assumed this was generally included.  So my question is: What is common for smaller businesses in the 600K to $1.2M SDE range?  Is net working capital left out of the deal altogether and buyer brings whatever is needed at close?  Or do you sometimes see net working capital included in the deal at this smaller size?  
Thanks!

5 likes
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15 comments

intermediary from University of Arizona

Echo what Mike says 110%. The seller is uninformed about NWC because too many novice brokers neither understand it nor educate their client early. ‘Cash Free-Debt Free’ has been bandied about by a number of the larger national franchise brokerages because their training of staff is limited at best, incorrect and misleading at worst.

1 month ago | like reply | 1 like

searcher from Cleveland State University

Sellers don't understand NWC. They understand the cash price you offer and assume they keep everything else. This is worse in SMB than in LMM but its always, always, always a problem with first time sellers

3 years ago | like reply | 1 like

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