One might think that calculating net working capital is a relatively simple exercise — current assets less current liabilities. However, this simple exercise can turn into a very complicated calculation during a transaction process. At a time when both buyers and sellers just want to move on, they instead face potential arbitration or litigation post-close that could have been avoided overall.
To avoid additional costs and strained relationships, buyers and sellers should take care to avoid common mistakes that can be divided into 3 categories: When Setting the Target, When Drafting Legal Documents, and After the Close.
Today’s focus is on After the Close
- Not performing an inventory observation at or near closing
Performing a full physical count of inventory at or around the date of the close will save major headaches when you’re trying to reconcile the closing balance sheet. You may identify inventory in additional (but forgotten) storage areas that should be counted or stock that is old and obsolete that should not be included.
- Not allowing enough time for a true-up provision
Although the transaction process can be grueling and you want to wrap up as quickly as possible, 30 days (or less) is not enough time to accurately calculate any true-up provision. You should have a reasonable look back period to ensure all information is available and included. More time allowed for the true-up calculation will provide the opportunity to identify transactions that should be included/excluded from the final true-up that otherwise might have been missed.
Calculating working capital can be confusing, complicated, and stressful, especially in the heat of a transaction. Having an experienced advisory team of accountants, tax advisors, attorneys, and bankers who can conduct a thorough review of the calculation can help alleviate some of the anxiety and provide for a smoother overall process.
If you have any questions, feel free to contact Joan Young, President of Sunbelt Business Brokers, Greater Bay Area – [email protected]. Sunbelt also handles Mergers and Acquisitions.