30th August 2023Normalised working capital and completion mechanisms

When someone offers to buy a business, they will usually value it based on an enterprise value, which assumes the acquisition will be on a cash-free and debt-free basis and subject to having a normal level of working capital.

The Enterprise Value is the value of the business. This is typically the maintainable earnings of a business to which a pricing multiple is applied. It does not however take account of the assets and liabilities that are being used to generate those earnings, and more importantly, it does not identify to the buyer or the seller whether there is an excess or deficit of assets required to operate the business in the foreseeable future.

Most deals therefore include a number of adjustments to the Enterprise Value to identify and compensate for any such surplus or deficits. These adjustments are mainly related to cash, debt and working capital levels.

+ Enterprise Value Value attributed to earnings
+ Cash Excess cash will be paid to the Seller
Debt Any debt owing to 3rd parties and owners shall be deducted
+ Working Capital Any excess of working capital over that needed to run the business will be repaid to Seller; any deficit will be deducted from the purchase price
Normalised working capital
= Purchase Price  


Whilst cash and debt levels are generally straightforward, assessing a normalised level of working capital is a subjective area. Negotiating an appropriate level can often be tricky.

So what is working capital?

In short, working capital is calculated by subtracting current liabilities from current assets as listed on the balance sheet. It is the amount of operating capital that a business requires in the day-to-day running of the business.

Working Capital = Current Assets – Current Liabilities

Current assets generally include a business’s current operating assets such as stock, trade debtors and prepaid expenses, but excluding cash or cash like items.

Current liabilities generally includes a business’s current operating liabilities such as trade creditors, accruals, and payroll liabilities, but excluding any debt such as loans, overdrafts and credit cards

Typically, when assessing what is normal, working capital will be measured over a set period (such as 12 months) and an average taken. The decision on how to calculate normalised working capital should not be underestimated, as it could have a significant impact on pricing.

The final figure will likely be the result of much negotiation, so it is vital that your advisor understands your business and the potential pitfalls of this price adjustment.

If you would like any advice, HW Fisher are experienced in undertaking working capital reviews, SPA advice and financial due diligences so do get in touch with Carolyn Hazard to discuss your needs.

Key contacts

Caroline Hazard HW Fisher

Carolyn Hazard

020 7380 4901
Contact Carolyn Hazard
Connect with Carolyn Hazard
Download vCard

Contact us

We’d love to hear from you. To book an appointment or to find out more about our services: