What is a Working Capital Target? Considering the full business cycle is essential, so establishing a “target,” which is an average over a period of months, is a common approach. Quite often this is a Trailing Twelve-Month (TTM) time frame, but depending on the growth of the company, it may be more appropriate to use three or six months.
Follow the Scout Motto: Be Prepared. It’s vital that you know how accounts receivable, payables, cash, and any net working capital requirement will be handled. That’s why it’s essential to work with a mergers & acquisitions (M&A) advisor who will ensure that you clearly understand working capital every step of the way. Because Touchstone Advisors speaks with hundreds of business owners and potential buyers, we can provide valuable insight into how working capital should be handled in the sale of a business.
Before signing any agreements, make sure you and your advisors are on the same page. Verify that the formula for determining working capital is clearly defined in the Letter of Intent (Offer) stage. If you wait until the definitive purchase agreement is being drafted, you may discover that you and the buyer are not in agreement. The unhappy result of this misunderstanding could cost you hundreds of thousands of dollars or even jeopardize the entire deal.