Navigating Working Capital through Volatility

Buying or selling a business has never been simple; however, the COVID-19 pandemic and subsequent inflation and supply chain issues have created additional complexities around transactions. Net working capital is one specific area where we’ve been asked to spend additional time to help ensure our clients are negotiating an appropriate working capital target. Here are a few specific complexities that we’ve identified while helping our clients through the deal making process  –

• Inflation – many businesses have seen price inflation impact working capital levels. For example, the same quantity of inventory may have a higher carrying value compared to 6 months ago. This may justify the use of a shorter term working capital average vs. the typical trailing twelve month average target.
• Supply Chain Issues – Has the business been required to carry more inventory than normal to account for excess lead times? Has the business carried less inventory than normal because they haven’t been able to procure appropriately? Have additional deposits been required to procure inventory? How have these issues impacted historical averages compared to closing date levels? Have the issues been resolved or are they still on-going? These are all questions you should be asking as you determine a working capital target.
• Extended Payment Terms – Many businesses have given customers extended payment terms to help manage cash flow. These changes to a company’s cash conversion cycle can drive artificial increases in average accounts receivable and/or accounts payable, directly impacting traditional working capital averages.
• Deposits and Prepayments – Certain businesses may require deposits or customer prepayment outside of its historical cash conversion cycle. Dealmakers should consider whether these should be part of working capital or indebtedness. A buyer could also require a seller to leave cash to offset the cost to earn the revenue.

How we can help

CLA’s deal services team is available to help both buyers and sellers navigate these challenges to help increase value and reduce risk throughout M&A transactions.