It is also possible for a company to have negative working capital. Negative labour capital is when a company`s short-term liabilities exceed its short-term assets. This means that commitments payable within one year exceed short-term assets that are monetized over the same period. Labour capital can be very different for different companies, including companies in the same sector. For example, a company that relies heavily on seasonal sales may have, at the time of closing, a working capital that is very different from the start of negotiations or the implementation of the MOU. As a result, working capital is often calculated by analyzing the company`s working capital over the next twelve months and taking an average. Labour capital is calculated by deducting a company`s short-term liabilities from its short-term assets (short-term assets – short-term liabilities – working capital). For example, if a company has more than $60,000 in short-term assets and $20,000 in short-term liabilities, the company`s working capital is $40,000. In general, the negatives are bad, but with labor capital, it is not necessary. When a company usually receives a payment before a product or service is delivered, the company can work with negative working capital.
Dell Computer used this business model for years, collected cash in advance, but then paid suppliers. However, when a company is working with negative labour capital, there is often more discussion during negotiations about whether some or all of the cash remains in operation at the time of sale. For most R and D, the parties obtain a purchase price by multiplying the profit before interest, taxes, depreciation and amortization (EBITDA) by an agreed multiple. While this is generally true, it is only part of the story. As a general rule, purchasers will also include on the balance sheet certain safeguards such as indemnification provisions, a third-party trust fund or other holdbacks and, very often, a requirement for a minimum amount of “working capital” when the agreement is reached to ensure that there are no immediate liquidity problems. Working capital is essential to running a business and is often implicit in determining the value of the business. A working capital barrier should allow the purchaser to receive, during the transaction, the expected mix of assets and liabilities (i.e.dem ordinary working capital of the business required for the activity). It is possible to change the mix of assets and liabilities in the short term without affecting the result and EBITDA, so that a seller retains its EBITDA, but cannot provide the promised mix. As a result, the buyer would end up with less cash flow than he had negotiated. The adjustment is not always dollar-for-dollar; it could be deducted from a multi-level structure.
In this case, the purchase price would decrease by a predetermined amount if working capital were between $7.5 million and $8 million. If the labour capital is $7 million to $7.49 million, the price would be reduced by a larger predetermined amount, etc. Seasonality should also be taken into account. The calculations of the 12-month obstacle generally take into account seasonality, but depending on whether the purchase is made in season or in season a, the actual working capital could be much higher or lower. If the agreement is reached in high season, working capital should be above average and the buyer should pay more. If the transaction is completed outside peak periods, labour capital is likely to be below average. In the case of seasonal activity, it may be useful to calculate the barrier only on the basis of the seasonal or non-seasonal period, depending on the time of purchase. In simple terms, labour capital is a short-term asset minus a short-term liability and the liquid portion of the balance sheet (i.e.: