One of the most important figures from Seller’s balance sheet for an M&A offering document is the company’s working capital. For the purposes of M&A, working capital commonly means current assets minus current liabilities. Typically,
Current assets = accounts receivable + inventory + prepaid expenses
Current liabilities = accounts payable + short-term debt + current portion of long-term debt + accrued (unpaid) expenses
For the purposes of M&A, you don’t include cash and equivalents in this calculation. However, for accounting purposes, you do include them.
Working capital is important because it represents the liquidity of the company. All current assets should be convertible into cash within 30 days, and all current liabilities should be able to be paid within 30 days.
Buyers, eye the balance sheet carefully to see whether the company you’re looking to acquire is sufficiently undercapitalized, has a reasonable reserve against bad (uncollectable) accounts, and has its current liabilities all within terms. If any of these items are remiss, you may be taking over financial trouble.
Depending on the nature of the business, working capital may have some seasonality. For example, retailers typically have very strong fourth quarters as their sales are driven by the gift-giving season. Other companies experience peaks in late summer with the back-to-school season. As Seller, you want to spell out how this seasonality affects working capital so that Buyer gets a more accurate view of your company’s situation.
