Sale preparation · Business services
Working capital in a business-services acquisition
Slower customer payments can reduce cash available for acquisition financing while increasing the seller's closing proceeds. Receivable quality and the agreed working-capital target determine the treatment.
Maintainable earnings
The owner of an illustrative business-services company proposes $4.38m of adjusted EBITDA against $3.20m reported. The proposal includes a $0.25m adjustment for recurring temporary labor that the buyer would continue to incur. Retaining this expense reduces maintainable EBITDA to $4.13m and enterprise value by $1.50m at the assumed 6.0× multiple. The earnings review therefore affects the proposed price even when buyer and seller agree on the valuation multiple.
The model accepts adjustments for a $0.40m legal settlement, $0.35m of excess owner compensation and a $0.18m ERP implementation expense. Acceptance depends on evidence that the settlement will not recur and that the remaining compensation expense covers the cost of replacing the owner's responsibilities. The ERP adjustment requires a separation of implementation expense from ongoing software and support costs. The description of an expense as a project does not establish that it will cease after acquisition.
Reconciliation of reported and maintainable EBITDA
$m per year · Recurring temporary labor remains an operating expense
View chart data · $m
| Component | $m |
|---|---|
| Reported | 3.2 |
| Legal settlement | 0.4 |
| Owner pay | 0.35 |
| ERP project | 0.18 |
| Maintainable | 4.13 |
Working-capital investment under the growth plan
The buyer's operating plan assumes revenue increases from $28m to $35m, with the EBITDA margin unchanged at 14.75%. The resulting $1.03m increase in EBITDA is accompanied by $0.93m of additional net working capital, defined here as receivables plus inventory less trade payables. Maintaining the existing 55-day collection period requires $1.05m of additional receivables. The combined inventory and payable movements offset approximately $0.12m of that investment.
After incremental cash tax and maintenance capital expenditure, the higher earnings contribute $0.61m of additional cash. Since working-capital investment exceeds this amount, cash available declines by approximately $323,000 to $2.11m, compared with approximately $2.43m under flat sales. The buyer must include the $0.93m investment when assessing cash available for debt service and distributions.
This investment arises during the forward year as revenue increases. Once sales and collection terms stabilize, maintaining the larger balance sheet does not require an identical annual cash outflow. Further revenue growth would require additional working capital under the stated assumptions.
Collection terms and liquidity
At $35m of annual sales, each additional collection day requires approximately $95,890 of receivables. Extending the collection period from 55 to 72 days increases the funding requirement by $1.63m beyond the growth-related investment. Total incremental working capital reaches $2.56m, leaving $0.48m of annual cash from $5.16m of EBITDA before acquisition financing and distributions.
Annual cash reaches zero at approximately 86.7 collection days with flat sales, 77.0 days with 25% growth and 72.9 days with 40% growth. Faster revenue growth increases the cash requirement associated with each day of delayed payment. These thresholds exclude interest, debt amortization and growth capital expenditure, so they cannot establish the collection period compatible with a proposed debt structure.
To preserve the cash generated by the flat-sales case while achieving 25% growth, collections would need to improve from 55 days to approximately 51.6 days. The forecast would need evidence of achievable billing or collection improvements before assuming this reduction.
Annual cash by collection period and revenue growth
$m in the forward year · Includes cash tax, maintenance capital expenditure and the change in working capital
View chart data · $m
| Collection days | 0% revenue growth | 25% revenue growth | 40% revenue growth |
|---|---|---|---|
| 45 | 3.2 | 3.07 | 2.99 |
| 50 | 2.82 | 2.59 | 2.45 |
| 55 | 2.43 | 2.11 | 1.92 |
| 60 | 2.05 | 1.63 | 1.38 |
| 65 | 1.67 | 1.15 | 0.84 |
| 70 | 1.28 | 0.67 | 0.31 |
| 75 | 0.9 | 0.19 | -0.23 |
| 80 | 0.52 | -0.29 | -0.77 |
| 85 | 0.13 | -0.77 | -1.3 |
| 90 | -0.25 | -1.24 | -1.84 |
Full original scenario grid
| Collection days / Revenue growth | 0% | 5% | 10% | 15% | 20% | 25% | 30% | 35% | 40% |
|---|---|---|---|---|---|---|---|---|---|
| 45 | 3.2 | 3.18 | 3.15 | 3.12 | 3.1 | 3.07 | 3.04 | 3.02 | 2.99 |
| 50 | 2.82 | 2.77 | 2.73 | 2.68 | 2.64 | 2.59 | 2.55 | 2.5 | 2.45 |
| 55 | 2.43 | 2.37 | 2.31 | 2.24 | 2.18 | 2.11 | 2.05 | 1.98 | 1.92 |
| 60 | 2.05 | 1.97 | 1.88 | 1.8 | 1.72 | 1.63 | 1.55 | 1.46 | 1.38 |
| 65 | 1.67 | 1.56 | 1.46 | 1.36 | 1.26 | 1.15 | 1.05 | 0.95 | 0.84 |
| 70 | 1.28 | 1.16 | 1.04 | 0.92 | 0.8 | 0.67 | 0.55 | 0.43 | 0.31 |
| 75 | 0.9 | 0.76 | 0.62 | 0.48 | 0.34 | 0.19 | 0.05 | -0.09 | -0.23 |
| 80 | 0.52 | 0.36 | 0.2 | 0.04 | -0.13 | -0.29 | -0.45 | -0.61 | -0.77 |
| 85 | 0.13 | -0.05 | -0.23 | -0.41 | -0.59 | -0.77 | -0.94 | -1.12 | -1.3 |
| 90 | -0.25 | -0.45 | -0.65 | -0.85 | -1.05 | -1.24 | -1.44 | -1.64 | -1.84 |
Receivable quality and customer concentration
The valuation of overdue receivables requires invoice-level evidence. Extended contractual terms can delay a collectible payment, while a disputed invoice may require a credit or write-down. Reviewing invoice dates, customer acceptance, contractual terms and subsequent receipts establishes the expected collection amount and timing. The buyer's funding forecast should reflect the expected timing, and the closing calculation should include only amounts that qualify under the agreed definitions.
An improvement in average collection days can coincide with a large unresolved balance at one customer. Identifying the customers responsible for the additional receivables allows the buyer to assess their payment history and any proposed extension of credit terms. Revenue growth dependent on further concessions to these customers would require a corresponding increase in the collection assumptions.
The working-capital adjustment at closing
The closing calculation uses $24.78m of enterprise value, based on $4.13m of maintainable EBITDA and the fixed 6.0× multiple. The projected $5.16m of EBITDA is used in the forward-year funding assessment and does not change the modeled transaction price.
The working-capital target assumes 55 collection days on $35m of sales, while closing balances reflect 72 days. If the additional receivables are collectible and eligible under the agreement, the $1.63m surplus above target increases the seller's proceeds. Deducting $8.40m of net debt and $0.65m of fees produces $17.36m for the seller before owner-level taxes and any escrow or holdback omitted from the illustration.
The buyer pays for these additional receivables at closing and subsequently collects the balances. Slow payment alone does not establish a deduction from the seller's proceeds. The adjustment depends on the agreed target and the amount eligible for inclusion. In this calculation, the $0.93m investment associated with revenue growth is already included in the target. The surplus measures only the additional 17 collection days at $35m of sales.
Reconciliation of enterprise value and seller proceeds
$m at closing · Assumes collectible receivables qualify above the agreed working-capital target
View chart data · $m
| Component | $m |
|---|---|
| Enterprise value | 24.78 |
| Net debt | -8.4 |
| WC surplus | 1.63 |
| Fees | -0.65 |
| Seller cash | 17.36 |
Acquisition funding and the opening balance sheet
The acquisition date determines whether the receivables increase is funded through the closing payment or through subsequent operations. If collection delays develop after acquisition, the buyer finances the increase as it occurs. If the balances exist at closing and are purchased through the working-capital adjustment, they are included in the acquired opening balance sheet.
The post-closing forecast must begin with those acquired balances. Adding the $1.63m closing surplus to transaction funding and recording that amount again as a new post-closing working-capital outflow would double-count the receivables increase. A sources-and-uses schedule dated at closing, reconciled to the opening balance sheet, establishes the amount financed in each period.
Annual cash flow does not measure the maximum funding required during the year. A monthly forecast of payroll, customer receipts and transaction payments is required to assess cash deficits before allocating cash to distributions.
Sale preparation and unresolved adjustments
For this transaction, sale preparation requires an exception schedule identifying the proposed treatment of each earnings adjustment and disputed receivable, with supporting evidence. The labor entry should state the recurring staffing cost to remain in the buyer's budget. Each receivable entry should identify expected collections, any credit or dispute, and eligibility under the proposed agreement.
Before accepting a working-capital target, both parties need to reconcile its sales and collection assumptions to the forecast. The funding schedule must also identify the receivables expected at closing so that subsequent customer receipts and further working-capital investment are measured from the acquired balances.
The assumptions and exclusions below define the worked scenario.
Model notes and assumptions
- Opening revenue $28m; reported EBITDA $3.20m. Accepted adjustments are $0.40m legal settlement, $0.35m owner compensation, and $0.18m ERP implementation. A $0.25m recurring labor adjustment is rejected.
- Normalized EBITDA margin is held at 14.75%. Cost of goods sold is 64% of sales; inventory and payable days are 20 and 30. Opening receivable days are 55.
- Maintenance capex is $0.80m and depreciation $0.55m at opening revenue, each growing with sales. Cash tax is 25% of positive EBIT; no interest, growth capex, or tax loss carryforward is included.
- Cash available = EBITDA − cash tax − maintenance capex − increase in net working capital. All cases represent a single forward year.
- Sale value uses a fixed 6.0× multiple, $8.40m net debt, $0.65m fees, and a working-capital target at 55 collection days on $35m sales. The seller-cash bridge adds actual working capital above the target; all receivables are assumed collectible and included at face value.
No client outcome is represented. Add-back acceptance, financing, and closing adjustments depend on the actual evidence and agreement.