Working Capital

Working capital = inventory plus trade receivables minus trade payables. It is the money that has to stay in the business between goods arriving and customers paying. In an M&A deal, buyer and seller agree a "normal level" of working capital at the reference date. If the actual level is below that, the purchase price is reduced; if it is above, the purchase price is increased. What counts as normal (typically the trailing twelve-month average) is often negotiated, especially in a seasonal business.

Example

Inventory 0.8 million euros, receivables 1.2 million, payables 0.6 million. Working capital = 0.8 + 1.2 − 0.6 = 1.4 million euros. Against a normal level of 1.2 million euros, that is an addition of 0.2 million euros to the purchase price.