Finance Things Nobody Explains (pt. 13): Why Working Capital Matters in M&A

@vinnyhale

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Why it worked

The video breaks down a complex financial concept (working capital in M&A) into easily understandable terms with a clear example. The use of on-screen text reinforces key points, making it highly digestible and shareable for a finance-interested audience.

Summary

This video explains why working capital is crucial in M&A deals. It details how the amount of working capital at closing can significantly impact the final purchase price, affecting both the seller's proceeds and the buyer's ability to operate the business post-acquisition.

Structure

1Introduction to working capital's importance in M&A
2Example of a $100M deal and how working capital affects it
3Definition and components of working capital
4Consequences of insufficient working capital for the buyer
5The role of working capital targets in negotiations
6Conclusion: Working capital's impact on deal value and operations

Product placement

The video discusses working capital in the context of Mergers & Acquisitions (M&A). It uses examples of purchase price, accounts receivable, inventory, and accounts payable as components of working capital.

Original caption

In M&A, the purchase price gets the headline, but working capital can quietly change the final check. #finance #accounting #mergersandacquisitions #privateequity #valuation

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On-screen text

Finance Things Nobody Explains (pt. 13): Why Working Capital Matters in M&A FINANCE THINGS NOBODY EXPLAINS, PART 13. WHY IS WORKING CAPITAL SUCH A BIG DEAL IN M BECAUSE IN A PRICE IS NOT ALWAYS THE FINAL PURCHASE PRICE. LET'S GO THROUGH AN EXAMPLE. SAY A BUYER A BUSINESS FOR $100 MILLION. MOS T PEOPLE THINK THAT THAT IS BUT IN MANY DEALS, THAT PRICE ASSUMES DELIVERED WITH A NORMAL LEVEL OF WORKING CAPITAL. WORKING CAPITAL USUALLY INCLUDES THINGS LIKE ACCOUNTS RECEIVABLE. IT INCLUDES INVENTORY, A P, AND IN SIMPLER TERMS, IT'S THE CASH TIED UP IN RUNNING THE DAY. HERE'S WHY IT MATTERS. IF A SELLER COLLECTS ALL THE RECEIVABLES BEFORE LETS INVENTORY RUN PAYING VENDORS, THE BUYER MAY TECHNICALLY GET THE BUT NOT ENOUGH WORKING CAPITAL TO ACTUALLY OPERATE IT. THE BUYER WOULD PUT MORE CASH INTO THE BUSINESS RIGHT AFTER CLOSING THE DEAL. SO BUYERS USUALLY REQUIRE SOME SORT OF NORMAL AMOUNT OF WORKING CAPITAL TO BE LEFT IN THE COMPANY. THAT IS WHERE A WORKING CAPITAL TARGET COMES IN. IF ACTUAL WORKING CAPITAL AT CLOSING IS ABOVE THAT TARGET, GET PAID MORE. IF IT'S BELOW THAT TARGET, THE SELLER MAY GET PAID LESS. THIS IS WHY SELLERS AND BUYERS NEGOTIATE WORKING CAPITAL SO HEAVILY. IT CAN MOVE REAL DOLLARS AT DEAL AND IT CAN THE BIGGEST FIGHTS IN A DEAL. BECAUSE THE SELLER WANTS CREDIT FOR DELIVERING VALUE. THE BUYER WANTS TO MAKE SURE A BUSINESS THAT IS UNDER FUNDED ON DAY ONE. SO WORKING CAPITAL MATTERS BECAUSE IT PROTECTS THE BUYER, IT IMPACTS THE SELLER'S PROCEEDS, AND HELPS MAKE CAN KEEP OPERATING AFTER THE DEAL IN M&A, A PURCHASE PRICE WILL DEFINITELY GET BUT WORKING CAPITAL CAN QUIETLY CHANGE THE FINAL CHEQUE THAT GETS WRITTEN. THIS CONTENT, YOU HIT THE FOLLOW THE LINK IN

Transcript

Finance things, nobody explains part 13. Why is working capital such a big deal in M&A? Because in the deal, the purchase price is not always the final purchase price. Let's go through an example. Say a buyer agrees to buy a business for $100 million. Most people think that that is the number, but in many deals, that price assumes the business is delivered with a normal level of working capital. Working capital usually includes things like account receivable. It includes inventory, AP, in in simpler terms, it's the cash tied up in running the business day-to-day. Here's why it matters. If a seller collects all the receivable before closing, let's inventory run down and delays paying vendors, the buyer may technically get the business, but not enough working capital to actually operate. The buyer would then have to put more cash into the business right after closing the deal. So buyers usually require some sort of normal amount of working capital to be left in the company. That is where a working capital s in. If actual working capital at closing is above that target, the seller may get paid more. If it's below that target, the seller may get paid less. This is why sellers and buyers negotiate working capital so so heavily. It can move real dollars at deal close and it can become one of the biggest fights in a deal because the seller wants credit for delivering value. The buyer wants to make sure they're not buying a business that is underfunded on day one. So working capital matters because it protects the buyer, it impacts the seller's proceeds and helps make sure the business can keep operating after the deal closes. In M&A purchase price will definitely get the headline, but working capital can quietly change the final check that gets written. If you like this content, you want to see more, hit the follow button and click the link on my bio.