Working Capital: How Can the Seller Prepare for the Debate?

The question: how could a seller prepare for a debate on working capital?

When buying a business and conducting their due diligence investigations, a buyer and his advisors might be doing everything they can to find data which points to a high working capital requirement for the business they are purchasing.

What could a seller do to prepare for the debate?

"Do nothing" is one answer that is debated regularly in my training rooms. And I understand the point of view. The logic is that the purchaser might not raise working capital as an issue at any point. The seller bargains on purchaser ignorance or purchaser stupidity or their own absolute confidence that any detailed investigation will show that the business is being sold with a robust working capital position. Personally I think this is a risky strategy and the seller could find themselves suffering a price reduction late on in the process.

What's the alternative strategy?

The alternative for the seller is to work to prepare themselves in advance of a potential argument. The seller could present a picture of "normalised working capital" for the business and argue that any extraordinary fluctuations e.g. two years ago were one-off. This strategy sees the seller trying to get on the front foot and looking for an opportunity to present their own view of working capital.

Opportunties for the seller to present their own picture of working capital include:

1. The IM. The information memorandum, released early on to all bidders in the process, could contain a broad overview of working capital requirements. In practice I have rarely seen this done though.

2. Vendor due diligence. In something called vendor due diligence, the seller could commission accountants to provide a detailed picture of the business's finances and release this to short listed bidders. Alternatively, without commissioning a large piece of vendor due diligence, the seller could just ask his advisors or accountants to provide some supplementary information on the business's working capital position, once the identity of short listed bidders is known.

3. Dataroom. The seller could provide some information on working capital in the dataroom. this is relatively late on in the process when the buyer has his own accountants trawling through files of information on the business's contracts and finances. Success here assumes that a number of buyers are proceeding through to this phase of the process (or at least waiting in the wings, eager to jump back into the process) and the seller is not already stuck with one bidder who is looking for any excuse to chip away at the price.

Wan't it the scouts who had the motto "be prepared?". And yes, in case anyone is wondering, I was one of them and obviously something stuck!

Alternatively, if there are some fly-by-night advisors reading this, and all of 1-3 sounds like too much trouble and work, there's always the "do nothing" option. I'm happy to be argued with but I'm still thinking it's a recipe for a price reduction and a grumpy seller!

Please see www.cpd-courses.org for a sample outline from FTA Ltd’s “financial issues” course, which covers this and related areas.