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How Does Net Working Capital Affect the Value of Your Business?

So, what is NWC? Net working capital is a measure of a company's short-term liquidity, and is calculated by subtracting current liabilities from current assets. This number can give potential buyers a good idea of a company's financial health, and how easily it will be able to meet its short-term obligations. 

If your NWC is positive, it means that your company has more assets than liabilities, and is in good financial health. This is obviously the ideal situation and will make your company much more attractive to potential buyers. However, if your NWC is negative, it means that your company has more liabilities than assets - which is a red flag for potential buyers. 

There are a few things you can do to improve your NWC before selling your business. First, take a close look at your inventory and accounts receivable. Make sure that you're not carrying too much inventory, as this can tie up a lot of cash that could be used to pay down liabilities. Accounts receivable is another area where you can improve your NWC by collecting payments owed to you more quickly. 

You should also take a close look at your current liabilities, and see if there are any that can be paid off early. This will reduce your overall liabilities, and improve your NWC. 

Finally, remember that the buyer's perspective is key when selling your business. Make sure that you understand their motivations and what they'll be looking for when considering your company. Net working capital is just one piece of the puzzle - but it's an important one and it is often cause for headache for many business owners.

We're here to help if you have questions - reach out for a no cost, confidential discussion with our team.

Author
Todd Sullivan

Todd graduated from Yale University where he was a 2-time MVP of Yale’s ice hockey team. After a year as a minor league hockey player in the San Jose Sharks and Toronto Maple Leafs organizations, Todd returned to school for his MBA at the University of Michigan where he graduated as Entrepreneur of the Year. Todd went on to build and sell four companies over the next 25 years with offices in Boston, San Francisco, Chicago, New York and Detroit. After the sale of his last business in 2015, Todd has dedicated his time to educating his fellow founders about the M&A process and helping many of them maximize the sale of their businesses.

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