You need to understand working capital is a real cost in the total investment when buying, or selling, a business.
Buyers need to make sure there is enough cash to run the business, especially during those first few critical months.
The number one issue of most new business buyers is running short of cash to meet their immediate obligations, such as inventory, rent, salaries. There are also all sorts of other expenses that are easily forgotten in the midst of the excitement of buying and running a business.
Working capital is essential to operating a successful business because there must be free-flowing cash to pay the bills.
Sellers usually do not think about the impact of all the components and timing aspects of working capital on the buyer of their business. Why, because its is not seen as the seller’s problem.
Business brokers can help guide the parties to understand working capital and total enterprise value, and how to structure and successfully settle business sale transactions.
In the eyes of business brokers and professional advisors the main components of working capital are:
- Short-term cash requirements plus
- Customer accounts receivable plus
- Inventory less
- Supplier accounts payable, equals
- Net working capital
Buying or starting out in your new business should be an enjoyable challenge, not a struggle to pay the bills from day one. To ensure you don’t find yourself in such a situation be sure to get the right advice from experienced professionals who know all the problems and pitfalls. If you need assistance in buying a business, you’re welcome to call us on (02) 8221 8818.