Cold Link Africa Jul/Aug 2016 Vol 1 No 6 | Page 43

BUSINESS SURVIVAL TOOLKIT
INCORPORATING COLD CHAIN

Olivier Barbeau is the managing partner of Moore-Stephens, a major accounting and consulting network. He holds the following degrees: B.Comm (Accounting), University of Witwatersrand; Hons BCompt, University of South
Africa; and LPSF, Harvard University. He has been involved as a principal/ leader in various corporate finance and advisory firms for over 15 years. He has extensive corporate finance experience, having initiated, developed, and
implemented transactions for listed and unlisted companies. His primary areas of focus are mining and BEE transactions. He is a registered chartered accountant in South Africa and Mauritius.

Selling your business Part 6
In the final instalment of this six-part series on selling your business, we look at
understanding the impact of working capital.
that is mutually acceptable. The amount is
documented in the sale agreement, along
with what is included and excluded in
working capital calculations.
Given the length of the sales process
and normal business fluctuations, the level
of working capital at hand over time often
differs from the agreed amount, so the base
price is adjusted up or down.
The amount at stake can be significant.
However, the amount is only known after the
sale agreement has been signed so it’s too
late to negotiate or turn back. Take the time
now to understand how the working capital
adjustment mechanism is calculated so you
can negotiate it in your favour.
Optimising the outcome – five tips
1. Understand target working capital
The working capital target (or peg) should
be the average working capital a business
needs to operate efficiently. This is based
on a company’s historical working capital
level and/or the working capital level of
comparable businesses.
Conduct a detailed analysis of your
business’s historical working capital
averages before agreeing the target
figure and adjust for any unusual events.
By calculating averages over a number of
timeframes, you will see which one provides
the most favourable (low) and least
favourable (high) outcome for you so you
can steer negotiations.

2. Pay attention to variations
If your businesses is based on seasonal
sales or purchases, timing can make a big
difference to working capital. Remember
this when negotiating a settlement date.
The diagram shows a business with a
stock build up at the end of quarters 2 and
4. The average working capital of R100K in
2013 was used as the target level.
The deal closed at the end of quarter 2
2014, when the working capital level was
R160K, so the excess working capital of R60K
was added to the base purchase price. If
the deal had closed at the end of quarter
3 when working capital was R70K, the R30K
deficit would have come off the base
purchase price.
3. Define working capital clearly
A mutually agreed definition of working
capital is critical and must reflect the
business’s true short‑term funding
requirements. Imprecise definitions can
lead to disputes involving sizeable amounts

that may only be resolved by armies of
expensive lawyers.
To avoid this, analyse the possible
balance sheet accounts and match them
to the working capital definition in your sale
agreement.
4. Verify reported working capital assets
Buyers are often suspicious of unaudited
financial accounts as sellers can overstate
the working capital required. Having an
accountant verify your reported working
capital assets will put buyers at ease and
increase their confidence in your openness
about other aspects of the sale.
5. Seek professional support
The financial impact of a poorly negotiated
working capital adjustment can be
significant. An experienced professional
will provide valuable assistance when
negotiating the sale price mechanism,
remove uncertainty and provide peace of
mind. CLA

THOUSAND

W

orking capital can drastically
impact your sale proceeds. Walk
away with more by understanding
how. My final article focuses on the role of
working capital in the sales process – a topic
I mentioned briefly in Part 1.
Working capital needs vary from business
to business and there is no standard
definition. But in general terms, working
capital is the capital that is tied up to fund
your day‑to‑day operations. The amount
required usually increases in line with your
business’s size.
While most business owners recognise
that good working capital management
can optimise cash flow and alleviate
funding pressures, many fail to understand
the critical role of working capital
when they sell. How does it affect your
transaction price?
Buyers and sellers typically have different
ideas about how much working capital
should remain in the business.
Buyers want to ensure there is sufficient
working capital to trade without having to
inject any cash, so they prefer a generous
amount. Sellers prefer to minimise working
capital because they will pocket more of
the sale proceeds.
In the sale run‑up, sellers can and do
manipulate working capital accounts to
favour them. A way to increase certainty
and avoid arguments is for both parties to
negotiate a target working capital amount

COLD LINK AFRICA • July | August 2016

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