Thanks for providing this clear explanation!

Great explanation, thanks.

extremely helpful video and i find it quite accurate, coming from a big 4 TAS service line background

Great video! Thank you

Great stuff

Great content. Maybe in a future video touch on debt free/cash free clause and how it affects working capital adjustments.

Top-notch

Very good.

Wouldn't it be more appropiate if we measure working capital and calculate the average (target level) on days rather than using average value ? What do you think? Thanks

hi, Could you help me clarify the example you provided in a previous reply (the gift card business) please? Say customers paid $100 bucks for the gift cards. The company debited cash and credited DRs for an equivalent amount then they recognized the revenue at the time the gift cards were used (or ratably over time?). At the time the company was sold, of the $100, $60 go to COGS leaving $40 in the till. The seller leaves 50% of that to the seller ($20) to cover remaining costs so it should be taking $20 in cash from the DRs. How can it be 10% of gross sales then? Thank you

12:35 Hi, why does reducing working capital lead to extracting higher cash benefits?

Just went through the video again. Some solid gold in there 😁. On the topic of inventory, how would you do DD on its quality and hence its valuation? (already, checking inventory accounting convention can help a bit: LIFO vs FIFO. But what else can and should be done?). We ask for AR/AP aging to assess the quality of these WC items, i assume you would not take inventory at its "face/book value" in an M&A deal. Thanks

@financekid3163

2 жыл бұрын

Inventory is usually acquired at cost with certain measures in place to limit old/aged inventory that is unsellable. For example, buyers would buy all inventory that is less than < 12 months old and pay cost for it. For inventory beyond 12 months, a value of __% is deducted against the historical cost. As part of the DD, you want to ask for an inventory aging report to see the breakdown of inventory and when it was acquired to complete this analysis. Additionally, prior to closing you would like to contract a CPA firm to complete a third-party inventory count to confirm the value of the stock is correct relative to what is being reported in the aging reports to prevent any fraud. Hopefully this helps!

@jd5787

2 жыл бұрын

@@financekid3163 makes sense. So it is a similar approach to AR/AP where you ask for the aging report and then deduct based on what can be recovered in the ARs etc. Thanks

In the case of a software business with (for example) 1 year and 3 year prepaid deals which boost deferred revenue, would you include or exclude the DRs in the NWC calculation? Do you include/exclude only the short term ones? Also, NWC can be negative in the case of Software companies because of DRs if they are included in the calculations. Does the buyer need to compensate the seller to bring the NWC to 0? Thank you

@financekid3163

2 жыл бұрын

Great question, I have another NWC video coming out soon that will address deposits and deferred revenue accounts. Usually these accounts are excluded from NWC and addressed separately with a certain % of cash held back to offset the account value. The rationale is that because the cost in delivering these future revenues has not been incurred yet, the buyer would like to have cash to cover the cost or they would be buying future costs while the offsetting revenues have been collected via the cash taken out of the NWC formula. For example, I worked with a business that had gift cards (deposits), and the buyer/seller agreed to leave 50% of the cash behind to cover the cost of delivering the services associated with these gift card sales (the GM% was close at around 40% which means the seller would only net 10% gross on those sales). The timing of the deferred revenue payment for the software deal needs to follow a similar rationale or else the buyer is just buying costs which is not market. Hopefully this helps.

@jd5787

2 жыл бұрын

@@financekid3163 hi, thanks! so the seller wants the DR to be included in WC and the buyer would prefer to have them out (dollar for dollar adjustment against cash). Could you help me clarify your example a bit please? Say customers paid $100 bucks for the gift cards. The company debited cash and credited DRs for an equivalent amount then they recognized the revenue at the time the gift cards were used (or ratably over time?). At the time the company was sold, of the $100, $60 go to COGS leaving $40 in the till. The seller leaves 50% of that to the seller ($20) to cover remaining costs so it should be taking $20 in cash from the DRs. How can it be 10% of gross sales then? Hope to read you soon! Tks .

Thank you all for your comments and support, I have published an updated net working capital (NWC) negotiation & analysis video dedicated to smaller private business transactions with some relevant case examples. Check out the video link here kzread.info/dash/bejne/anWD2K2ec8eneJM.html

Hey FinanceKid, I found your video very helpful. It would be great to email you a few questions and get your thoughts. Are you okay with providing your email address? Thanks, Shaun