Price adjustment for negative working capital and seasonal business

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by a searcher from EDHEC Business School, Lille and Nice
in London, UK

4yrs ago

Price adjustment for negative working capital and seasonal business

Hi guys,

I am about to put an offer on a business with negative working capital (customer invoice paid in a few days but payables at 30 days; no inventory). The business also is seasonal and by the time we close the very busy season will be behind us, so effectively leaving us from day 1 with few receivables and quite significant payables.
How would you approach the negotiation with the seller?

I was thinking introducing in the LOI an "uncommitted cash balance", effectively making sure the cash balance left on the balance sheet would be free of invoice, payables raised and accrued expenses before the closing date.
Then having the price adjustment clause pegged on the uncommitted cash balance.
What do you think of it? Curious to see how searchers approached the issue

Thanks a lot for your help!
Tom

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reply by a searcher 4yrs ago
from EDHEC Business School, Lille and Nice in London, UK

Thanks gents - I should have said. The business has low margin and my start bid on a very low multiple. So if I propose a purchase price net of payables, the optics are wrong. All smoke and mirrors of course...

reply by an intermediary 4yrs ago
from The University of Chicago in Chicago, IL, USA

In general, it is difficult to convince a seller on many fronts. For you to introduce new concept "uncommitted cash balance" may be risky. I have taught negative WC for many years and have sold many businesses with negative WC. The concept of debt-free cash-free balance sheet is too simplistic. W/o getting into more details, ^Brad Hettich 's approach "In essence the difference between A/P and A/R was to be the responsibility of the seller at closing" is the proper one" for negative WC (but not for positive WC). Note: A/P to include all liabilities.
You may be trying to make up for negative WC with low multiple. If it works, great. If not, consider, normal multiple with seller responsible for A/P.