The relevance of working capital is often underestimated even in takeovers. In short, working capital is often the balance of short-term receivables and payables necessary for a financially healthy and operationally undisturbed management of your activities. Too much is not necessary and too little is inconvenient from a liquidity and operational point of view.
In 'good' times, there is often less attention to and management of working capital. When buying or selling, the (net) working capital is almost always the subject of discussion between buyer and seller which can then lead to an unpleasant discussion and/or an unpleasant surprise (negative correction) when settling the purchase price/sales proceeds of the company.
Equity value
This is because many acquisitions are on a "cash & debt-free" basis, in which case the calculation of net working capital excludes all liquid assets or liabilities (cash & debt) and items similar to them (cash & debt-like items).
The proceeds of your company, also known as Equity Value, is then the value that the buyer assigns to the activities of your business, also known as Enterprise Value, with another correction for any excess cash, (interest-bearing) debt and a possible working capital correction.
If you as a seller do not pay attention to the optimization of your working capital until or during the sales process, you will probably receive a lower sales price. And conversely, if you as a buyer do not conduct a substantive and careful dialogue about the working capital during the purchase process, you run a good chance that you may end up paying too high a purchase price.
Tips on working capital
- Don't underestimate the relevance of working capital.
- As a seller, start optimizing (reducing) your working capital in good time in light of a future sale, even if you feel this need from a liquidity point of view less. An optimized net working capital is always to your advantage and yields hard euros upon sale!
- As buyer and seller during an acquisition, always take into account the average working capital requirement, often looking back at the previous year and, in the case of rapidly growing companies, looking more ahead, because growth often leads to increasing working capital requirements.
- At the beginning of the acquisition process, make clear and concrete agreements with the other party about the method of calculating the net working capital in order to avoid unpleasant discussions.
- And finally, let yourself be assisted by an acquisition adviser who has a broad experience also in the branch in which you are active, so that he or she can also properly assist you around optimizing and determining the level of the working capital.
