There are more than a dozen ways you can maximize the exit value of your business if you plan for it.
One way is to manage working capital consistently in the year of and year prior to a sale. This will help you avoid inflated assessments from buyers on how much working capital is required to run the business.
Many business owners assume all working capital is their's when they sell. But that is often not the case.
In fact, for most private company sales, working capital is a big component of the purchase, and a demonstrated level needed to manage the business is included in the buyer’s purchase price.
What we see most often is a 12-18 month look back on working capital levels, with its average assumed to be the amount of working capital required to run the business.
If, at the time of closing, the seller maintains working capital above this agreed upon average level, they get an upward adjustment to the sales price to account for their additional working capital contribution.
Conversely, if at closing the seller has collected most of the A/R, and working capital is below its average, the sales price is adjusted downward dollar for dollar by the amount working capital is below the negotiated requirement.
Not knowing this can cost the seller if they take a passive approach to working capital management, letting customers delay payments, and carrying more inventory than is necessary to avoid more frequent purchases.
The assumption in a business sale is that the seller has done the best they could managing working capital, so the levels shown are the levels necessary.
If you’re planning a sale, make good on that assumption, and keep A/R and Inventory as lean as possible to demonstrate the least amount of working capital needed to run the business.