Working Capital Negotiation with Small Business Owner

by a searcher from University of Virginia-Darden - Darden School of Business

1 year ago

The working capital portion of the negotiation has always been a hurdle when talking with small business owners because it's typically their first time going through a business sale (and if there is a broker, they're not always helpful###-###-#### The most recent situation has been challenging.  At first, the seller wanted to retain the AR balance at close or be paid for it in excess of my offer.  After I explained the rationale for it being a part of the business purchase, we negotiate the working capital peg that would be used to measure against at close.  Making things a bit more complicated is a recent price increase that is pushing AR up on an LTM basis (I'm conceding on a higher peg because this increase should benefit me on a run rate basis).  

All this being said, I'd love to hear how others approach this step in the negotiation.  How early do you tackle it, and is there a tried and true way to make it a smooth discussion with an understandably unsophisticated small business owner?

3 likes
269 views
16 comments

searcher from Miami University of Ohio

I have had a couple deals fall through because of this very reason - I think one of the most important parts when negotiating this is letting the standard come from a third party rather than the buyer (seller often views it as the buyer wanting their cake and eating it too)

4 months ago | like reply | 0 likes

intermediary from St. Vincent College

Working capital is such a sensitive subject amongst sellers. Buyers generally expect it in a turn-key operation, but sellers feel that since the main components of working capital were earned (AR) or bought (inv) under their ownership it should be theirs. In my humble opinion how it is handled impacts the deal's value, just like many other structural components of the deal (e.g. earnouts and seller notes are not the equivalent of cash at close), and it should be considered accordingly when evaluating the offer. The sooner both parties get out in front of the issue the better.

1 year ago | like reply | 0 likes

More on Searchfunder

Just Closed on My First Deal! Reflections and Takeaways for other Searchers

45,152 transactions are available on Searchfunder (now searchable by keyword)

Now everyone has unlimited IBISWorld access

Family office looking for traditional searchers

Examples of self-funded searcher websites

Investor seeking Self-Funded Search Deals

What are market terms for Seller Notes?

2 Best Ways To Find Motivated Sellers, Off-Market Deals

Searchfunder is an online community and toolkit for searchfunds. Over 80% of those involved in searchfunds maintain a Searchfunder.com account to help them network, problem solve challenges, and keep up with the industry.

We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.