In business acquisitions, much attention is paid to revenue, profit and multiples. This makes sense, as these determine the value of the company in the first place. Yet in practice it often turns out that a large part of the real value is hidden in something less visible: working capital.
Both sellers and buyers regularly underestimate its importance, which can lead to difficult discussions during negotiations or unexpected price adjustments just before the transfer.
Difference in interpretation
A recent transaction illustrates this well. When acquiring a manufacturing company, the numbers seemed solid: stable margins, healthy profits and a tidy balance sheet. During due diligence, however, it was revealed that the inventory position had increased significantly in the months before the sale.
The company had purchased additional raw materials to get ahead of rising prices, something the seller saw as a temporary investment. The buyer, however, assessed this as a structural drain on liquidity. The difference in interpretation amounted to over €300,000 - directly affecting the final purchase price. Without a thorough working capital analysis, this would not have come to light until after the transfer.
Working capital standardization
In a sale or purchase, it is therefore essential to have a timely understanding of the company's normal working capital requirements. That means analyzing how inventories, accounts receivable and accounts payable develop over time and what level is needed to keep operations running smoothly.
Buyer and seller often have a different view here: if the working capital is lower than usual, then the buyer may have to finance extra after the acquisition; if it is higher, then the seller can actually extract value from it. In many transactions, this is incorporated in the so-called working capital normalization and closing adjustment.
Financially satisfied
For sellers, it is wise to monitor the development of working capital at least a year before the sale, properly substantiate seasonal and one-time items, and avoid large deviations just before the transaction.
Buyers would do well to look not only at profitability, but also at liquidity flows, and to be advised on what is a normal level of working capital within the industry. These insights are also valuable in determining the purchase price and payment structure.
Working capital seems like a technical item on paper, but in practice it often determines who is left financially satisfied after the acquisition. So a carefully conducted due diligence review looks not only at profits, but also at the movement under the numbers. Therein lies the real value - or the real risk.
