I have noticed a real upturn in merger and acquisition activity so far during 2018.

One of the matters which may need addressing when buying or selling a business will be how to deal with surplus assets already held by the target business. Certain assets can be straightforward, such as excess cash or investment properties not required to carry out normal trading.  What is often a trickier matter is calculating the working capital surplus or deficit.

A common concept within the deal process is the assumption that there will be a normalised amount of net working capital.  The problem will be calculating what the normalised net working capital is.  The calculation requires a considerable level of judgement and is typically calculated on the basis of historical accounts of the target company.  If the buyer operates within a similar business activity then they should have their own experiences to draw upon and can also review levels of networking capital from comparable publically traded companies.

The buyer will want to ensure that adequate funding for the target company is available for it to operate over the foreseeable future, normally a twelve-month period.  They will want to ensure that this period removes any distortion arising from seasonal business.

Once both parties have carried out their calculations to assess the normalised net working capital a period of negotiation will usually occur with arguments to and fro regarding the businesses normal operating cycle, its growth stage and the current state of assets and liabilities.  There will also be a negotiation about which items should be classified as part of the components making up working capital.  Accruals for items which may be linked to performance such as bonuses are an example of an item which may require some robust discussions as to whether it is excluded or included.

As is often the case there are arguments that can be made by both sides regarding whether items should or shouldn’t be included in the calculation and how they are actually computed.  In the end it will come down to a matter of negotiation between the parties.

If you would like to discuss this concept or any other related matters regarding the purchase and sale of a business, please contact either Nigel Whittle or Paul Short who regularly deal with the firm’s corporate finance matters.

Nick Forsyth

 

 

Posted by Nick Forsyth

 

 

Disclaimer
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.

Lambert Chapman Chartered Accountants

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