Selling a business includes many opportunities for negotiation – but you can only benefit from these opportunities if you are familiar with the different components of a business deal. We created this four-part series of blogs to pull back the curtain on business deal structures and provide helpful information to entrepreneurs like you. This article is Part Two.
When a buyer wants to purchase your business, they present an offer document that includes not only the proposed purchase price, but also the proposed payment terms, conveyance of assets, legalities, post-closing transition period, and more. In Part One, we looked at negotiating payment terms. This week’s article covers the three main types of assets conveyed in a business sale and important considerations for each.
3 Types of Assets to Negotiate When Selling a Business
If your business carries inventory of any type, the amount of inventory that is conveyed and included in the purchase price is something you can negotiate. Typically, the amount is a 12-month normalized average.
In recent months, we have seen deals where the seller has had excess inventory in order to stay ahead of the supply chain issues. When this occurs, you can negotiate that the excess inventory value is in addition to, rather than part of, the purchase price.
Net Working Capital
First, a clarification: working capital (WC) and net working capital (NWC) are synonymous. The terms are interchangeable and refer to the difference between a company’s current assets and current liabilities according to its balance sheet.
Current assets normally include cash, accounts receivable, and inventory. (Bigger businesses may track prepaid expenses and marketable securities on their balance sheet.)
Current liabilities normally include accounts payable (often money owed on inventory) and short-term debt. (Bigger businesses may track dividends, notes payable, and taxes owed.)
Depending on your deal size, the buyer will either have net working capital added to the purchase price from the lender or request it from the seller. The specific formula used in the deal can be negotiated because different types of businesses have different cycles and processes. A normal net working capital would be calculated over a 12-month average.
Work In Progress
Within your Accounts Receivable, you may have some sales or jobs that are 100% complete and some that are still a Work In Progress (WIP). If a job or sale is 100% complete, that amount usually belongs to the seller. For a WIP, however, make calculations to determine the amount of the job that has been completed. Then, when payment on the job or sale is received, the payment is split accordingly. We normally see this split based on the percentage completed unless there is a heavy upfront cost to the seller to get the project started.
It is normal to initially focus on purchase price, but as you can see, there is much more to consider. We firmly believe that one of the best ways to achieve your desired outcome is to be well-informed. That is why, at Viking, we encourage business owners to engage with us in the earliest stages of the selling process – even when selling still seems far off. We are here to ensure that you have all of the guidance and information you need to do what is right for you.
When a client decides it is time to sell and an offer is received, we personally explain and discuss the various components of the offer and provide our seasoned guidance. The decision to accept, reject, or negotiate parts of a business deal structure will always be yours. Have you considered selling your business? Reach out to us today for a no-cost, confidential consultation.