What is Working Capital?
Working capital represents the short-term liquidity of a business and is calculated by subtracting current liabilities from current assets as shown on the company’s balance sheet. A low working capital position can indicate potential difficulties in maintaining day-to-day operations, whereas a high working capital level suggests the business can comfortably cover its short-term liabilities with its short-term assets, reflecting a healthy operational position.
Why Buyers Assess Working Capital in M&A Transactions
In an M&A transaction, the buyer assesses working capital to ensure the business has sufficient short-term resources to continue operating effectively post-completion. The buyer typically analyses working capital trends over the previous 12 to 24 months to identify any anomalies and establish the normal operating levels. This helps the buyer determine the appropriate amount of working capital the business requires to run smoothly, which in turn informs the offer price.
Working Capital Adjustments at Completion
At completion, the actual working capital is compared to an agreed target level:
- Below target: If the actual working capital is below the target, the buyer receives a price reduction (deficit).
- Above target: If the actual working capital is above the target, the seller receives a price increase (surplus).
