Non-Cash Working Capital (NCWC) considerations for company sale
The Non-Cash Working Capital (NCWC) is financial assets which is calculated after considering the value of all the current assets of the business excluding the cash component, and deducting the current liabilities. Usually during the due diligence of a business which is being considered for sale, the historical NCWC of the business is calculated for each month for a period of two or three years prior to the sale of the business. This will help the potential buyer to understand the working capital which the business will require to ensuring that the business will continue functioning, paying all the ongoing business expenses like the salaries.
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 sale of the business with any potential buyer. When a buyer purchases any business, the purchase price which is 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 sale price of the business is a reasonable amount for the NCWC.
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 amount of NCWC, is usually 10% of the sales revenue. Hence other businesses in the same sector having sales of $10 million, the NCWC will be lower at two million dollars on an average. This implies that the business being sold has historically required more working capital for its normal functioning when compared to 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 remains with the company, even if all other businesses in the same sector only require $ two million. Hence it is important for a business owner to be aware of the right level of the working capital for the business based on the 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.
It is particularly important for a business owner to reduce the working capital levels in the business if they are considering selling the business. This ensures that the business is not selling the business with cash in the form of working capital when the deal is being finalized with the buyer. By reducing the working capital reduced for running the business, the cash which was required for the working capital, will be returned to the owner, before the business sale is being finalized. This ensures that the business owner gets the best deal from the company sale.
