Recap: Net Working Capital with Bruce Marks

Today's session with Bruce surfaced the framing I wish every first-time searcher had before writing their first LOI. Most buyers don't overpay because they negotiated a 6x multiple instead of 5x. They overpay in two hidden ways: 1. First, giving credit for an addback. If the seller adds $15K of personal expenses back to earnings and you accept it, you're not paying $15K for that line item. You're paying a multiple of $15K. At 4x earnings, that's $60K of purchase price on one addback decision. 2. Second, conceding that the business doesn't need to come with working capital. You pay a market multiple on EBITDA, and then you separately compensate the seller for the receivables. You've just paid twice for the same asset. Bruce's framework on the second one is simply, "Need determines amount." The business needs working capital to operate. It comes with the deal at purchase, or you fund it yourself out of cash, line of credit, or over-equity. There is no third option that doesn't cost you somewhere. A few other tactical points worth keeping top of mind: - Always verify cash vs. accrual basis accounting before assessing WC. You'll see different AR/AP balances depending on which method, and the cash basis statements often hide assets that should be on the balance sheet. - Plot monthly balance sheets, not just year's end. Annual snapshots miss seasonality entirely, and seasonality is where searchers get caught short on cash in months 3 to 6 of ownership. - If the business has an existing LOC you'll need to replicate, talk to the current lender before you sign. SBA loans don't go that high and don't do ABL lending. Bruce has seen deals dead before they started because the existing LOC wouldn't transfer. If you've got a working capital negotiation question I didn't cover here, post it below. Session 3 is next Tuesday on Letters of Intent with Eric Pacifici of SMB Law Group.