Can my deal have too much Working Capital?

by a searcher from IE Business School

3 years ago

Hi Everyone, 
I am curious into how many deals go through with a value of working capital at closing. In one of my deals I have about 1/4 of the purchase price in working capital that will remain in the business at closing. I have been told this is not very common, what are your experiences? I know some might not discuss this until the end of closing a deal, but I thought it was important to get out in the open air so we are on the same page from day 1. Let me know!

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searcher from University of California, Berkeley - Haas School of Business

Lets get to basics: I am assuming by WC you mean your WCLOC. The size of your WCLOC is formulaic based on the availability of your current assets (AR, Inv, and WIP). Can you have too much? Well it is very common usage is less than availability. You should always want abundant amount of access to capital so long as you have productive use for that capital. However don't get confused into thinking carrying more AR and Inv is a good thing to increase your WCLOC. Think value creation <> ROIC. Your situation might be specific pm me if you want to chat.

9 months ago | like reply | 0 likes

searcher

It depends on your finance terms! You can overfinance a deal, pull money out for WC, & directors if you have them but keep in mind it depends on the terms of the deal if the deal cannot stand on its own two feet & pay for itself after the finance & working capital then you need to reassess. & You should take a look at the rest of your financials for the deal before pulling out any WC.

9 months ago | like reply | 0 likes

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