The Working Capital Value Trap

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There is often debt aversion in small or family-run businesses. Many leave excess cash in the company to not stress about working capital ups and downs (receivables, payables, inventory, etc.).

When these companies enter into transaction processes, they almost always leave money on the table when it comes to working capital adjustments as it can be difficult to determine the true level of recurring working capital required to operate efficiently.

If outside groups like quality of earnings providers get involved, they are often limited to using conservative assumptions for CYA purposes (hired by the buyer!).

Naturally it doesn’t cross owners minds that their low stress approach to cash management could cost them millions come deal time. There is no problem with debt aversion, that’s a fine personal preference, but make the effort to understand more about your working capital requirements of your business so you can present a compelling analysis to a prospective buyer that is more likely to use debt and seek to minimize excess cash balances!

Avoid the working capital value trap.

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