Non-Cash Working Capital (NCWC) considerations for a company sale
The Non-Cash Working Capital (NCWC) is a financial asset calculated after considering the value of all the business’s current assets, excluding the cash component and deducting the current liabilities. Usually, during the due diligence of a business that is being considered for sale, the historical NCWC of the business is calculated for each month for two or three years before the sale of the business. This will help the potential buyer understand the working capital that the business will require to ensure that the business will continue functioning, paying all the ongoing business expenses like the salaries.
Non-Cash Working Capital Explanation
The amount of NCWC required for running the business is one of the most disputed aspects of the business when the business owner is negotiating a business with any potential buyer. When a buyer purchases any business, the purchase price offered will usually cover the price of the current and fixed assets of the business. This is because these assets will be required by the business to function normally, to sell products or services as before, as the business did before the business sale was finalized. One of the assets whose value is considered in the business’s sale price is a reasonable amount for the NCWC.
Non-Cash Working Capital Example
A company has a sales revenue of $10 million, has typically required approximately 15% of the sales value in NCWC. The NCWC amount for the business is $1.5 million. However, for other businesses in the same industry sector, the average NCWC is usually 10% of the sales revenue. Hence other businesses in the same sector had sales of $10 million; the NCWC will be lower at two million dollars annually. This implies that the business being sold has historically required more working capital for its normal functioning than other similar companies in the same sector.
A potential buyer of the company may insist that the three million dollars which the company has historically required for running normally remain with the company, even if all other businesses in the same sector only require $ two million. Hence, a business owner needs to be aware of the business’s right working capital level based on industry standards. If the working capital required by the business is higher than the industry standards, it may be necessary to make some changes in the way the business is run so that it conforms to the industry norms.
A business owner needs to reduce the business’s working capital levels if they consider selling the business. This ensures that the business is not selling business with cash in working capital when the deal is being finalized with the buyer. By reducing the working capital reduced for running the business, the cash required for the working capital will be returned to the owner before the business sale is finalized. This ensures that the business owner gets the best deal from the company sale.
