Calculating negative working capital seller payout (if any) on completion

July 23, 2020

by a searcher in United Kingdom

Hello Searchers.

I was hoping you might be able to help shed some light on correct pay outs for negative working capital businesses. Arguments for and against?
Should there be any payout as the cash will be required to pay creditors later on (after generating more cash###-###-#### it is just a question of timing.

Thoughts / ideas welcome. Many thanks.

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Reply by an investor
from University of Virginia in Tampa, FL, USA

I bought a negative W/C business and struggled with the same issue. Our issue was the business received cash payments from customers before closing (customer pre-payments were on oldco's balance sheet), but we (newco) were responsible for paying vendors after closing related to those pre-closing customer pre-payments. That margin is rightfully the seller's to keep, so you need to reduce the purchase price (closing proceeds to seller) by the costs that you'll incur after closing in servicing those customers for which cash was received from customers pre-closing. To the extent possible, add some buffer as you should be paid for offering this "service" to the seller. But, hopefully, you'll have further customer pre-payments shortly after closing that'll get you the cash buffer you need. Better safe than sorry on liquidity. Anyway, hope that helps.

Reply by a searcher
from Columbia University in Melbourne VIC, Australia

Great post on how to approach conversation around WC pegs here: https://www.searchfunder.com/post/why-working-capital-matters-in-your-search-fund-acquisition

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