Business for sale? Clayton & McKervey CPA says “Keep tabs on net working capital to maximize proceeds in the deal”

Clayton & McKervey, an international certified public accounting and business advisory firm located in metro Detroit, advises businesses considering a sale to meticulously monitor their net working capital a year or two before they put themselves on the market. Net working capital (NWC) is defined as the current assets of a company, such as inventory, accounts receivable and prepaid expenses, in excess of current liabilities like trade payables and accrued wages—and is essentially what allows a business to operate from day-to-day, according to Margaret Amsden, CPA and Clayton & McKervey shareholder who heads the firm’s tax practice.

“When a company makes the choice to put itself up for sale, there are many factors it has to consider, but sufficiently managing net working capital at least 18 months before its sale is key to making sure that it doesn’t end up leaving significant value on the table,” Amsden said. “On the other hand, potential buyers will be making sure there’s enough net working capital to allow the company to operate in the days immediately following the transaction. It can be quite a balancing act as buyers generally set the target for the NWC.”

If business sellers want to maximize the proceeds of a sale, then the NWC will need to be maintained at a level as low as feasible to still operate the business. Amsden recommends that selling companies ask the following questions:

1. Are we carrying excess inventory?
2. Are we prepaying expenses that don’t need to be prepaid?
3. Are we paying payables significantly ahead of their due date?
4. Are we fully accruing expenses at the end of a period?

Amsden notes that within specific transactions, items normally included in the net working capital, such as cash, refundable tax payments, or related party receivables and/or payables may be excluded from the NWC definition as agreed to by the parties. Agreements generally require buyers to pay for excess NWC and require sellers to make up any NWC shortfall.

“This prevents sellers from altering the value of a company by driving down receivables or letting payables build up in the days leading up to a transaction,” Amsden said.

Purchasers will often look at the NWC over a 12- to 18-month timeframe and set a target for NWC based on the average of that period—underscoring the importance for a selling company to manage its NWC well before the transaction is expected to occur.

“Recognizing that it takes time to true up prepaid amounts and book accruals is vital to assuring that these adjustments are made accurately on a monthly basis as the business approaches its transaction,” Amsden said.

But, there are exceptions to the rule. It may become evident that there are valid reasons for a company to carry excess NWC such as:

• Excess inventory may be carried due to significant quantity discounts to be obtained or there may be certain inventory that is scarce.
• Accounts payable may be lower than customary to take advantage of early payment discounts.

“In these situations, it is important for the seller to articulate why there are exceptions so the buyer understands that the proper NWC targets have been set and the sale can proceed at the right price,” Amdsen concluded.


About Clayton & McKervey
Clayton & McKervey is a full-service CPA firm helping middle-market entrepreneurial companies compete in the global marketplace. The firm is headquartered in metro Detroit and services clients throughout the world. To learn more, visit claytonmckervey.com.

 

Hitachi Business Finance Announces Completion of Deals Totaling $7 million

Hitachi Business Finance, a division of Hitachi Capital America Corp. and a leader in easy and flexible financing for growing companies, recently provided $7 million in working capital to two companies.

Of the new clients that received funding, the first is headquartered in Michigan. The company provides steel fabrication services and is a supplier to many different industries and organizations, including the US Department of Defense. With their $4.5 million line of credit from Hitachi Business Finance, the company now has a more comfortable cash flow position and plans to pay off existing loans, as well as take on additional work.

“Quite a few companies, in all varieties of industries, have been discovering the need for asset-based lending,” said President and COO Mike Semanco. “Whether it’s been fulfilling a huge order or hiring new personnel, our flexible and tailored lending gives these companies the cash flow assistance they need to take that next step forward.”

Additionally, Hitachi Business Finance was also instrumental in helping a Georgia-based educational provider. After consulting with the owners and learning that future sales are predicted to be at all-time highs, Hitachi was able to offer a $2.5 million line of credit supported by A/R, inventory, and equipment. The company plans to use the money to pay down the existing owner and purchase additional inventory.

“Assisting companies in their growth and development is something we are proud to be a part of,” said Chris Mitchell, regional VP and business development officer. “We know that in today’s market, competition is fierce, which is why we take pride in giving companies the cash flow they need to rise in the market.”

About Hitachi Business Finance
Hitachi Business Finance provides easy, flexible financing to support a company’s continued growth and success. A division of Hitachi Capital America, the company offers A/R financing, lines of credit, and government contractor financing. Based in Rochester, Michigan, with an office in Atlanta, we provide cash flow solutions for small- to-mid-size companies across the United States. Visit www.hitachibusinessfinance.com or call (248) 658-1100 to learn more.

About Hitachi Capital America Corp.
Hitachi Capital America Corp. is an independent, diversified leasing and financial services company providing financing to commercial businesses and other Hitachi companies in the United States. We offer a variety of asset-based financing solutions with a focus on truck, trailer, and floorplan financing; trade financing; medium/small ticket financing; structured financing; vendor financing; and asset-based lending.

Learn more at www.hitachicapitalamerica.com.

Tightening Credit Market Has Companies Looking for Different Working Capital Options

A less than favorable economic outlook is one of many reasons bankers say they are tightening credit for commercial and industrial loans, according to a recent Federal Reserve senior loan officer survey.

Worried that commercial borrowers may not be able to repay loans with a slow-growing economy, banks have enacted stricter standards to ensure repayment. In fact, more than 54 US bankers surveyed said their institutions have placed stricter standards on business loans and lines of credit.

With less access to working capital, many small- and medium-size businesses will be forced to turn to other sources, such as friends and family, private equity, and high-priced online loans. There are many alternatives to consider when financing your business, says Hitachi Business Finance President Mike Semanco.

“Banks may be the first option business owners think of. But looking past traditional lending is critically important. With so many options, business owners must do their research and evaluate all of their options.”

For instance, Semanco says that looking for state grants, pitch competitions and asset-based lending may be helpful.

“Asset-based lending is pretty much what the name implies: lending against your assets. Two specific types – A/R financing and lines of credit – have the time tested ability to sustain and grow a business when traditional methods of financing aren’t available.”

A/R financing is the sale of accounts receivable or invoices at a small discount to receive immediate cash. An asset-based line of credit is based on various resources, such as accounts receivable, inventory, equipment, or real estate. Asset-based lending has been viewed as a stepping stone to bank financing, with loans focused on the value of the asset and not solely on a company’s cash flow. Today, with an unstable oil and energy market, along with tighter credit restrictions, it’s not necessarily a stepping stone as much as it is a bridge.

Semanco offers a few examples of how real-life companies recently used asset-based lending to spur growth:

• $5 million line of credit to a company in the very constricted and regulated oil and energy industry. With a new source of funding, the firm was able to focus on growth and the development of new business.

As with most business owners, the company president did approach traditional lenders, but was unable to meet their increasingly strict requirements. With a recommendation from a trusted advisor, the company sought an asset-based loan. After a thorough review of their business and balance sheet, the company was able to secure a line of credit now that allows them to maintain a comfortable cash flow.

• $1 million in A/R financing to a distributor of hunting gear and equipment. With a rapid expansion plan in place for this year, the company was in need of working capital financing to support such growth. With $1 million in A/R financing, the company plans to purchase new inventory, bring on additional staff, and updated marketing initiatives can be developed and deployed.

If a small business can secure bank financing to meet their working capital needs, they should do so, suggests Semanco. However, the current economic climate may be making that more difficult, and with the availability of asset-based lending, companies should look beyond traditional lending to make payroll, secure new clients, and evaluate expansion projects.

About Hitachi Business Finance
Hitachi Business Finance provides easy, flexible financing to support a company’s continued growth and success. A division of Hitachi Capital America, the company offers A/R financing, lines of credit, and government contractor financing. Based in Rochester, Michigan, with offices in Atlanta, we provide cash flow solutions for small- to-mid-size companies across the United States.

Learn more by visiting www.hitachibusinessfinance.com or calling (248) 658-1100.

About Hitachi Capital America Corp.
Hitachi Capital America Corp. is an independent, diversified leasing and financial services company providing financing to commercial businesses and other Hitachi companies in the United States. We offer a variety of asset-based financing solutions with a focus on truck, trailer, and floorplan financing; trade financing; medium/small ticket financing; structured financing; vendor financing; and asset-based lending.

Learn more at www.hitachicapitalamerica.com