Why not exclude NWC and account for extra $$ to save the pain of confusion?
September 06, 2024
by a searcher from London Business School in South Africa
I am negotiating an LOI at the moment, asset sale, $500k SDE for $430k. The $500k SDE is previous FY, $300k in previous year, breakeven 3 years ago, and stable $200k in prior years. 6 month order book predicts $700k SDE in next 12m.
It is a project-based engineering business with egregious add-backs, hence the discounted multiple. The owner is extremely financially unsavvy, to the extent that he doesn't have a handle at all on net profit vs gross.
I learned today that the seller assumes he will collect the cash on AR. The broker is not helping - he has the view that working capital is never included in asset sales. Even if the concept was understood, the practical nature of establishing the peg would be a nightmare given the month-to-month lumpiness of WC.
I have stretched negotiations thus far, and the current structure / price has room to account for working capital cash on close.
Questions:
1) What do I risk by excluding NWC from the deal and making an estimate on historicals, then accounting for that cash on close?
2) I assume I would need to somehow account for / look out for accelerated invoicing for projects in progress just prior to close. Any ideas on how to handle that?
3) I should push to accommodate inventory in the sale (which is predominantly WIP) because to tease out the partial progress from upcoming progress invoices would just be a mess. Or just wear it and take the risk? Thoughts?
4) A/P would have to be excluded, and customer deposits included in the sale (reduction in EV). Right?
from The University of Chicago in Los Angeles, CA, USA
- A set amount of inventory coming with the business at close
- A reduction in purchase price for customer deposits for work that is not completed.
You will probably need to bring some additional cash get the business going day 1 and pay your bills, and you should calculate that before close and include it in your purchase price. (As well as the amount needed for future order book)
For me a concern is what you mentioned is around accelerated invoicing. Another related issue that I have seen in a project based businesses was that, in this case, the first part of a project is highly profitable and then the end is more break even. So you pick up projects halfway through and there is sales but no profit left.
Do think you are going to have to do a lot of diligence on these in-process projects as well as protect yourself through a holdback or seller's note.
from Queens College in New York, NY, USA
Additionally, any sales agreements for future work which are not transferable would need to be resigned. Those clients could decide against it and then your future pipeline dries up.
You should have the seller prepare a Work in Progress schedule and include a corresponding invoice schedule. Each open project should have a timeline, cost estimate, and profit estimate. You will be responsible for all of the remaining costs and you should be entitled to the profit per job or some % based on where each project stands. The invoice schedule should show the agreed upon invoicing cadence per contract, what invoices have been issued and what has/has not been paid. Open invoices should then match the open AR balances.