By Denis Reinhardt
In addition to net financial liabilities, net working capital is often one of the central points of discussion in an M&A transaction. Why this is the case becomes clear with a simple example: you acquire a company and want to start producing goods, but the warehouses are completely empty. Production comes to a standstill, and new goods must first be procured before the company is able to deliver the expected economic value.
Even though this example is rather extreme, it illustrates the concerns of a potential buyer. At the same time, a seller who has purchased materials for a major upcoming order shortly before the sale should also keep an eye on the net working capital. Entrepreneurs without M&A experience would not necessarily think of adjusting the purchase price in such situations. Here, external sparring can uncover hidden potential. When determining the objective value of a company, it is precisely these key figures—which do not appear in the profit and loss statement—that play an important role.
The simplest model of working capital is trade working capital, which consists of inventories, receivables, and trade payables. Yet even this simple model can raise complex questions. In negotiations, a deviation of working capital from its “normal” level is often offset by a purchase price adjustment. But what is a normal level? Is it a constant percentage of revenue? A fixed value? How are fluctuations in raw material prices considered? Inflation?
A comprehensive model of working capital also includes all other areas of the balance sheet that are not fixed assets or net debt. For example, advance payments received can quickly become a major influencing factor.
Even a seemingly simple model raises numerous issues. Incorporating additional positions into a full net working capital model does not make things easier. The goal must be to find an individual solution tailored to the company. In this context, the advisory services of i-capital can create real added value through extensive experience and an external perspective. After all, buyers and sellers do not always speak the same language—or even operate in the same industry. A mediator is often needed.
Finally, correctly identifying all relevant balance sheet items is not always trivial. Proper classification requires not only an understanding of the underlying transactions, but also a thorough grasp of how net working capital functions.
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