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Working Capital Considerations in Selling Your Business

While the definition of working capital is simple to define and monitor over time (current assets minus current liabilities), there are several considerations for business sales.  Your Advisors’ experience and preparation can smooth potentially contentious closing disputes.

For most small business sale transactions, working capital is fairly straight forward with the seller retaining accounts receivable, and paying all account payables off on the day of closing. However, there are many exceptions to this simple type of deal structure and many buyers and sellers will opt to include some or all of those current assets and current liabilities in the deal for various reasons.

Even if accounts receivable and accounts payable are not included in the sale, working capital is still an issue for most buyers who need an approximation of necessary operating capital needed to fund the first weeks / months of business. If the buyer isn’t concerned, usually his lender is.   The seller’s comfortable checking account balance may be all that is needed for a main street business, or a detailed working capital history may be warranted to provide buyers for more complex businesses.  Again, these are usually fairly easy to generate.

One of the components of current assets is inventory, and this almost always has closing implications for both buyers and sellers.  Usually, there’s an agreed “normal” amount of inventory that is stipulated in the offer and purchase agreement.  The difference between actual inventory on the day of closing and this stipulated amount in the purchase agreement is added or detracted to the purchase price at closing.  Any unexpected variance from this stipulated amount will cause someone heartburn.  Imagine being the buyer and needing to come up with an unexpected amount of funding at the last minute in the case of more inventory on hand than stipulated in the purchase agreement. Or imagine being the seller and receiving a check significantly less than expected if less the pre-closing inventory check shows less inventory value than expected.  Once in awhile we find a seller that tries to help out the buyer by taking advantage of discounts or buying ahead of inventory.  It’s always best to communicate with the buyer prior to doing this.  Usually, the key is to maintain steady, controlled inventory pre-closing and frequent communications with buyers to prevent surprises.

If account receivables and / or payables are included in the price, the trick is to keep the intended working capital in a neutral area.  Neither the buyer nor the seller should “come out ahead” in the deal structure concerning working capital.  The working capital calculations should be clearly defined, and the target should be agreed upon.  This requires the buyer to have adequate time and information to assess the historical working capital patterns and needs.  Determining what the working capital should be is often the most time consuming part of the process, but it is much better to spend this time than to accept a target with unknown consequences. 

Both sides need an understanding of the cash impacts at closing, and spend the time to define a fair target for inventory / working capital to minimize closing disputes and for neither party to leave unexpected cash at the table.

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Ten Steps To Selling Your Business

Our Sellers except us to achieve the highest and best offer for their business while taking the least amount of their time away from it as possible. That is because the absolute best use of their time is to continue to run and grow the company.  If revenue or profits begin to decline, buyers will walk away or decrease their offer. Transworld's philosophy can be summed up in a ten step, how-to strategy that culminates with the sale of a company. This proven method has been used to sell hundreds of businesses.  Here are the steps. Step1 Comprehensive Business Analysis and Feedback As your business broker, the first thing in our how-to strategy is to analyze your operation, finances, market potential and industry trends. We take that information and advise you on steps to prepare your business for sale, and  generate a business profile that represents your company in the most attractive way possible. Step2 Sale Structure We identify the best possible price range to sell your company. This is based on solid facts, the condition of the market, projected growth, sales potential and the sale of similar businesses within your industry. Transworld’s experts apply sophisticated, time-proven valuation techniques to ensure that your price is appropriate for the current market condition. The price must not be too high or too low. Yet, it must represent an attractive investment potential for the buyer. Step3 Confidentially Network The Business For Sale During the selling process, we utilize the latest technology to present your company to other business brokers and strategic buyers all over the world. This greatly multiplies the effort in your favor. With Transworld Business Advisors, you have literally thousands of industry professionals confidentially representing your company to buyers.   Step4 Confidentially Advertise To Buyers Our aggressive marketing program ensures your confidentiality and provides maximum exposure for your company. Your listing is placed in various industry databases, Internet sites, and publications which are constantly updated. We spend more money in advertising and marketing for buyers than anyone else in our industry. Step5 Control The Information Flow We organize all necessary documentation and release information only as needed. We use limited information when advertising to maintain confidentiality. Buyers are pre-qualified and required to execute a confidentiality agreement before receiving any sensitive business information. Step6 Create Competition For Your Company We attract thousands of buyers, creating competition for your business. Buyers are qualified for financial ability to meet the offer, and we engage you with only the most qualified buyers. Once you meet the best of the buyers, we urge them to prepare and present all offers. We can continue to engage potential buyers on your behalf as negotiation on an offer is in process and have another interested party ready to go should a buyer change their mind. Step7 We Negotiate For You To Achieve The Best Price Appropriate negotiation is crucial to achieving your best price and terms. We have the expertise to establish sound and resourceful negotiating techniques on your behalf. Transworld has trained all of its agents in the art of negotiating through curriculum that we have created specifically for our industry. Never negotiate without planning, expertise, or from a position of weakness. Step8 We Provide Exceptional Support To You Through The Due Diligence Process We take pride in our exceptional service. Only half of the job is finding the right buyer who will pay your price and meet your terms. The other half is getting that buyer to the closing table. We quarterback the deal, work with the accountants, lawyers, banks, landlords, and other third parties that could jeopardize the success of the transaction. We realize that you depend on us to guide you through the sale of your business. We make the transition simple and easy for you. We know when an opportunity for you may arise and are always there to take advantage of it. We also know when someone is trying to kill your deal or is being unreasonable and how to handle those situations. Step9 We Are There From Beginning To The Closing We help manage all administrative procedures, licenses, inventory counts and lease assignments that may be required. Transworld works closely with your advisors to ensure a smooth transition. Using the latest technology, we strive to be ready to work on your behalf to get the deal done! Step10 We Are There For The Transitional Phase And Beyond! Because we are in the business community, you may want to consult us from time to time after the sale. We will provide you with the assistance after closing. Transworld will always remain in your corner! Schedule Consultation Now

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