The business needs funding as well as a buyer
Customers may pay after invoices are raised, stock may be held before sale and suppliers may have their own payment terms. The operating cycle can tie up cash even in a profitable business. A headline price should therefore be examined alongside the funding needed to continue trading. A single year-end balance may not explain that requirement.
Agree what working capital means in the transaction
A simple teaching measure might use trade debtors plus stock less trade creditors, but transaction definitions can include or exclude other items. Identify how cash, debt and debt-like balances are treated elsewhere in the price calculation. The same item should not be counted twice without justification. The legal documents and accounting policies need suitable review.
A simplified adjustment illustration
| Hypothetical agreed mechanism | Amount |
|---|---|
| Assumed normal operating working-capital reference | £220,000 |
| Measured amount on the same assumed definitions | £180,000 |
| Shortfall against the reference | £40,000 |
| Illustrative pre-adjustment equity consideration | £1,200,000 |
| Illustrative consideration after deducting the shortfall | £1,160,000 |
This example assumes the contract deducts the shortfall pound for pound and that no other adjustments apply. It is not a statement that every deal follows this mechanism or that £220,000 is an appropriate target. Actual definitions, accounting treatment and terms determine the calculation.
Investigate seasonality and unusual balances
Review monthly movements, overdue receivables, slow stock, disputed balances and exceptional payment timing. A temporarily high bank balance may follow delayed supplier payments rather than demonstrate surplus cash. Explain the commercial cause of each movement before treating an average or recent balance as normal.
Keep valuation, completion calculations and proceeds distinct
The valuation explains value on its stated basis. A completion calculation applies the agreed transaction definitions. The seller’s personal proceeds also depend on ownership, payment timing, costs and tax. Mixing these stages can make a valuation appear to promise an amount it did not assess.
Use the valuation documents checklist to prepare records. For an MBO, also test the company’s post-deal operating funding; using every available pound for completion can leave the trading plan exposed.
Your starting checklist
- Monthly operating balances and explanations of unusual movements.
- Agreed definitions, reference level and measurement date.
- A clear link between the valuation, price mechanism and payment terms.
Frequently asked questions
Is working capital always added to the headline business value?
No. Treatment depends on the valuation basis and transaction mechanism. Avoid applying a separate adjustment without checking what the headline already assumes.
Can a year-end balance establish normal working capital?
Not necessarily. Seasonality and unusual items can make one date unrepresentative. Review the operating cycle and relevant records.
Does this example determine the adjustment in my sale?
No. It illustrates arithmetic under stated assumptions. Your contract, definitions, accounting policies and circumstances need their own review.
Further reading
Consult EFC preparation guidance. Examples are hypothetical and do not represent client results or a company-specific valuation. Any professional work requires an agreed scope and intended use.