Company sale: Example of a working capital definition for cash-free/debt-free arrangements

Working Capital Definition and Cash-free/ Debt-free Schemes

In the case of company sales, a so-called debt-free/cash-free arrangement is often included. In this context, both "debt" and "cash" and working capital must be defined. Below you will find an example of such a definition. This is designed for a specific individual case and is not generally valid. The working capital definition therefore only serves as an example of a corresponding regulation, which can certainly be negotiated for each M&A transaction:

Working Capital“ shall mean the sum of

(a) inventories (Vorräte, Section 266 (2) B I HGB),

(b) trade accounts receivable (Forderungen aus Lieferungen und Leistungen, Section 266 (2) B II No. 1 HGB),

(c) accounts receivable from Sellers or Sellers‘ Affiliates (Forderungen gegen verbundene Unternehmen, Section 266 (2) B II No. 2 HGB) to the extent that they relate to the supply of goods and services, and

(d) other current assets (sonstige Vermögensgegenstände, Section 266 para. 2 lit. B II No.4 HGB)

minus (short-term borrowed capital)

(e) prepayments received (erhaltene Anzahlungen auf Bestellungen, Section 266 (3) C No. 3 HGB),

(f) trade accounts payable (Verbindlichkeiten aus Lieferungen und Leistungen, Section 266 (3) C No. 4 HGB), and

(g) accounts payable to Sellers or Sellers‘ Affiliates (Verbindlichkeiten gegenüber verbundenen Unternehmen, Section 266 (3) C No. 6 HGB) to the extent that they relate to the supply of goods and services.

Current liabilities consist of all short-term liabilities (term <= 1 year). Furthermore, current liabilities include all tax provisions as well as other provisions and deferred income.

Is there a difference between working capital and net working capital?

No, net working capital (NWC) or net current assets (NCA) is just another term for working capital. In German, the term working capital is also used. The NWC is also an essential part of any balance sheet analysis.

Is there an optimal level for working capital?

In principle, a positive working capital or net current assets should be aimed for, as it shows that the company is liquid. A negative net working capital always shows that there is a financing problem in the company. The working capital in relation to turnover should nevertheless be as low as possible, because a high working capital in relation to turnover shows that the company is tying up a lot of liquidity, e.g. in the warehouse or in the receivables portfolio. Before a company is sold, working capital should therefore be optimised and recorded monthly as a figure - to see if there are seasonal peaks or troughs.

A buyer will always have a minimum amount of working capital guaranteed as part of the purchase price definition. If working capital is positive, then current assets cover all current liabilities. Thus, net working capital is an indicator of the company's solvency or liquidity (liquidity ratio). Components of current assets are, for example, raw materials and supplies, products and inventories as well as cash and cash equivalents belong to current assets or are found on the basis of the balance sheet items B.I.-IV. (asset side of the balance sheet). 

The higher the working capital, the more secure the liquidity and thus the ability of a company to act.Net working capital is part of any balance sheet analysis and an essential component when negotiating the purchase price in an M&A transaction.

Summary - Net Working Capital NWC) or Working Capital

  • The NWC is a balance sheet ratio
  • NWC is calculated as current assets less current liabilities and less cash and cash equivalents
  • The NWC is a component of the company's assets that is financed in the short term from the company's assets
  • The NWC is directly related to liquidity and thus to the solvency of the company
  • The NWC is thus a component of every balance sheet analysis and is also considered the golden balance sheet rule

KP Tech Corporate Finance

As a professional M&A advisor, KP Tech Corporate Finance advises either the buy side or the sell side in M&A transactions (not a corporate broker). In the run-up to a planned company sale, we analyse the possibilities for optimising working capital together with our client. We are happy to discuss with you in strict confidence the current company valuations, as well as the possibilities and probabilities of success in the event of a sale of your company. Contact KP Tech Corporate Finance in strict confidence by phone +49 89 21 53 66 09-0 to arrange a personal and non-binding meeting. Benefit from more than 20 years of experience in international corporate finance consulting.

Topic of this article: Example of a working capital definition for cash-free/debt-free schemes

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KP Tech has been providing consulting services for more than 20 years with a focus on company acquisitions, company sales, company succession, equity capital and company valuation. Our clients include small and medium-sized companies as well as international groups and private equity companies. Most of our clients come from the technology, services and consumer (including e-commerce) & healthcare sectors.


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