With Covid-initiated supply chain issues, this has increased the working capital (WC) requirements of many businesses. As such, it is an opportune time to review the impact of working capital on small business values.
progress, then this must be funded by the purchaser. i.e., effectively an additional investment amount that the purchaser has to allow for.
Note: Stock/work in progress is typically included in the purchase price of a small business, so be careful not to double count this when calculating the additional working capital requirements (calculations for correct adjustments will be shown later in this article).
Small businesses are commonly transacted in the marketplace, where only the unencumbered operating assets of goodwill, stock/work in progress, plant and equipment are transferred as part of the sale. However, many businesses carry significant overhead operating expenses, as well as having payment terms shorter for suppliers and longer for customers. Due to the timing difference of when expenses have to be paid for and when customer payments are received, additional funds are required to cover the shortfall. This is essentially “working capital.”
It is important that when using the common market methods valuation, such as the comparable transactions/ROI method, that working capital is correctly allowed for.
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