HELP for LOI: Working Capital and Accounts Receivable in Trade Company

by a searcher from United States Air Force Academy

7 months ago

Hi all,

I'm working directly with the seller of a company and we're looking at 2.5x multiple on a sub-$1M EBITDA trades company, which is the fair market value for a company like this. 

I submitted an LOI to the seller and he balked at the provisions for WC and AR, suggesting that we would need to increase price by $500K to cover those things. 

I'm looking to chat with someone who has closed on a transaction like this, and who can shed light on how they worked through their negotiations on these issues. Also, how does the SBA consider these aspects when it comes to their inclusion in the price?

Thanks in advance,
David

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searcher from George Mason University - School of Business

So under accrual accounting that works fine and dandy, but sub $1M price tag companies deal in cash accounting, so there is no AR and AP is paid monthly. I worked with a CPA and commercial lender friend to figure out how to word the working capital article in my LOI. Basically, in cash accounting, 'work in progress' and inventory and prepaid expenses are what I will be getting, because what I really want is to be able to get incoming cash flow in the following 2 months as my 'working capital'. If you are under accrual method, Sam Rosatti did a webinar and has a spreadsheet to calculate target working capital. Link is here: https://acquiringminds.co/webinars

4 months ago | like reply | 1 like

intermediary

Most business sales are no cash, no debt transactions. However, this does not mean Working Capital isn't included. To distinguish the two, it is helpful to understand that like furniture and equipment, all current operational assets and liabilities should be included in the sale. This includes things like AR, Inventory, AP, and Accrued Liabilities. Net Operational Working Capital = Operational Assets - Operational Liabilities = (AR + Inventory) - (AP + Accrued Liabilities). Generally, the most common source of disagreement stems from deciding which of the other current assets and liabilities are operational and which are not.

6 months ago | like reply | 0 likes

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