Working Capital Peg for an unusual transaction - how to go about it?

by a searcher from The University of North Carolina at Chapel Hill - Kenan-Flagler Business School

3 years ago

Hi everybody, I am reviewing a potential deal with the following profile. The question is, how to deal with NWC Peg in these circumstances? 

TTM Revenue - $6M
TTM EBITDA - $0.6M
TTM Current assets (A/R + Inventory, excluding cash) - $3.2M
TTM Current liabilities (A/P and other current liabilities) - $0.8M
TTM Cash: $0.2M
Now, working capital is current assets - current liabilities = $2.4M per above example.
Assume valuation at 4x multiple - $2.4M. 

As you can see, the TTM WC is equal to the Enterprise Value!  How to deal with the NWC Peg in this unusual situation?? 

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6 comments

professional from Rensselaer Polytechnic Institute

NWC can be a good vehicle for leveraging different puts and takes in the deal, but I've also seen instances where simpler AR/AP spreads are utilized as a pegging tool where it's either complicated or volatile. As Mitch describes quite accurately, it's about landing on a moving target and adjusting for the shift.

3 years ago | like reply | 0 likes

lender from University of Missouri - Columbia

Obviously I don't know much about the company, but the WC v. the revenue seems pretty high. WC at 50% of revenue would point to either a lot of slow paying A/R, inventory that is aged or at a minimum excess, or both (caveat being a seasonal business). You would want to use a cash flow forecast to determine not how much they have, but how much you will need. If the seller is expecting you to buy the WC at close then you are likely buying a lot of their inefficiencies. Once you have the number for the WC you need to operate, then you can negotiate with the seller.

3 years ago | like reply | 0 likes

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