The Role of Working Capital Analysis in Securing Acquisition Financing

Working capital is the cog in the flywheel of daily business activity, converting orders into sales. While vital, it is underemphasized with most acquisition financing transactions. Rather than appreciating its importance to day-to-day operations, some buyers look at working capital as an asset to squeeze out extra acquisition financing to fund the purchase price. While using working capital as part of the collateral package for acquisition financing makes sense for a unitranche lender, it only works to the extent that the company has excess availability in the form of cash or an untapped line of credit.

Working capital is a bit like a permanent asset that every company needs regardless of its strategic acquisition posture. When a buyer uses it to fund acquisition financing, it creates an imbalance that can engulf the company’s liquidity. While tempting to use as acquisition financing, it is more important to keep the working capital separate to fund the ongoing growth of the business. All buyers should conduct working capital analysis as part of their acquisition to understand its underlying variables and importance to financial viability.

Protecting Working Capital to Strengthen Acquisition Financing Outcomes

If the company has a naturally long dated cycle due to inventory build or slow paying customers, then preserving the singular integrity of working capital to fund the day-to-day activity is paramount. When the use of funds distorts the underlying function of working capital, bad things are bound to happen. Raiding the working capital leaves the company without enough cash to function. You may have successfully completed the acquisition, only to have diverted critical funding needed to pay bills leaving the company with no cash to operate. The best way to handle working capital is to appreciate its importance and to articulate its value to driving growth to your acquisition financing lender. Get them to see the standalone need for more working capital financing to operate on a larger scale. Structuring acquisition financing that has more room for working capital is the winning approach.