How Might Working Capital Affect Negotiations?

Let's imagine that a buyer of a business had gone to a lot of trouble (or, at least, his due diligence advisors had gone to a lot of trouble) to determine the working capital requirement for a target business. I'm guessing, or at least experience is telling me, that the buyer and his advisors have been doing their best to find a higher than expected working capital requirement.

What would the buyer do with that information i.e. the data that shows a higher than expected working capital requirement?

The buyer could use the information to argue for a price reduction.

This is on the basis that he needs to reserve funding capacity to cope with the working capital fluctuation. Because of the working capital fluctuation, the buyer can’t afford to pay as much to the seller. For example, as debtors increase the drain on cash flow will have to be funded with extra debt secured over the business, debt capacity will have to be reserved to cope with this fluctuation, and less funds can be raised at the start of the transaction to pay the seller.

Knowing that the buyer and his advisors are going to be doing everything they can to find a high working capital requirement and argue for a price reduction (am I being a little too cynical here?) , what could the seller do? Should they just sit and wait for the inevitable price chip? What could the seller do to prepare themselves for the debate?

See the next the next "working capital" post...

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