0
How might working capital affect a negotiation to buy a business?
Wiki User
∙ 14y ago
Let's imagine that a buyer of a business had gone to a lot of trouble (or, at least, his due diligence advisors had gone to a lot of trouble) to determine the working capital requirement for a target business. I'm guessing, or at least experience is telling me, that the buyer and his advisors have been doing their best to find a higher than expected working captial requirement.
What would the buyer do with that information i.e. the data that shows a higher than expected working capital requirement?
The buyer could use the information to argue for a price reduction.
This is on the basis that he needs to reserve funding capacity to cope with the working capital fluctuation. Because of the working capital fluctuation, the buyer can't afford to pay as much to the seller. For example, as debtors increase the drain on cash flow will have to be funded with extra debt secured over the business, debt capacity will have to be reserved to cope with this fluctuation, and less funds can be raised at the start of the transaction to pay the seller http://www.financialtrainingassociates.com/
Wiki User
∙ 14y ago
Add your answer:
Earn +20 pts
How does a stakeholder affect a business?
a stakeholder holds part ownership of the business. Therefore in all ways he does affect the business. in making decisions can affect the business operations. also in part of contributing the capital, this can lead either the business to gain enough or little capital and hence further affect the kind of business transaction to be carried out due to the capital collected.
How does an increase in revenue affect working capital?
Revenue affects the capital by decreasing the capital.
What is working capital and what factors affect the size of working capital in an enterprise?
Requirements Of working capital depend upon various factors such as nature of business, size of business, the flow of business activities. However, small organization relatively needs lesser working capital than the big business organization. Following are the factors which affect the working capital of a firm:1. Size Of BusinessWorking capital requirement of a firm is directly influenced by the size of its business operation. Big business organizations require more working capital than the small business organization. Therefore, the size of organization is one of the major determinants of working capital.2. Nature Of BusinessWorking capital requirement depends upon the nature of business carried by the firm. Normally, manufacturing industries and trading organizations need more working capital than in the service business organizations. A service sector does not require any amount of stock of goods. In service enterprises, there are less credit transactions. But in the manufacturing or trading firm, credit sales and advance related transactions are in large amount. So, they need more working capital.3. Storage Time Or Processing PeriodTime needed for keeping the stock in store is called storage period. The amount of working capital is influenced by the storage period. If storage period is high, a firm should keep more quantity of goods in store and hence requires more working capital. Similarly, if the processing time is more, then more stock of goods must be held in store as work-in-progress.4. Credit PeriodCredit period allowed to customers is also one of the major factors which influence the requirement of working capital. Longer credit period requires more investment in debtors and hence more working capital is needed.But, the firm which allows less credit period to customers needs less working capital.5. Seasonal RequirementIn certain business, raw material is not available throughout the year. Such business organizations have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the entire year. Thus, a huge amount is blocked in the form of raw material inventories which gives rise to more working capital requirements.6. Potential Growth Or Expansion Of BusinessIf the business is to be extended in future, more working capital is required. More amount of working capital is required to meet the expansion need of business.7. Changes In Price LevelChange in price level also affects the working capital requirements. Generally, the rise in price will require the firm to maintain large amount of working capital as more funds will be required to maintain the sale level of current assets.8. Dividend PolicyThe dividend policy of the firm is an important determinant of working capital. The need for working capital can be met with the retained earning. If a firm retains more profit and distributes lower amount of dividend, it needs less working capital.9. Access To Money MarketIf a firm has good access to capital market, it can raise loan from bank and financial institutions. It results in minimization of need of working capital.10. Working Capital CycleWhen the working capital cycle of a firm is long, it will require larger amount of working capital. But, if working capital cycle is short, it will need less working capital.11. Operating EfficiencyThe operating efficiency of a firm also affects the firm's need of working capital. The operating efficiency of the firm results in optimum utilization of assets. The optimum utilization of assets in turn results in more fund release for working capital.
How does Selling marketable securities for cash affect net working capital?
DECREASES
How might the borrowing of foreign capital affect the ability of your business to attract investment funds from the capital market?
27
How does the growth of business affect the capital?
With growth of business, the first problem that arises is shortage of capital. Infusion of fresh capital to accelerate growth can be arranged from private source or through bank finance.
How did industrialization affect business owners and working classes laborers differently?
Err
What is inflation on working capital?
What_is_inflation_on_working_capitalimpact of inflation onworkingcapital
How did the plague affect the normal business and life of the capital?
The plague affected normal business and life of the capital by taking out many workers, clergy and nobility, which resulted in the weakening of the fedual system of castes.
Are drawings an apportionment of profit?
Drawings are reduction of capital as it is owner withdrawal of cash from business and it do not affect profit.
What affect does an increase or decrease in accounts payable have on the statement of cash flow?
It effects in working capital changes in cash flow
How does selling common stock affect the balance sheet?
Selling common stock increases the cash of business as well as increase the share capital of business or liability of business and both are balance sheet items.
