THE BLIND SPOT!

In M&A deals, the buyer is purchasing the future earnings of the business, along with the assets that will produce them. Although valuations are initially derived from earnings considerations, the resulting valuation includes the buyer’s right to receive the ordinary and necessary balance sheet of the business; the Company’s Enterprise Value.

The Company’s Enterprise Value includes the operating assets of the Company, except for cash and long-term debt. The balance sheet delivered to the buyer at closing, however, should be adequate for the continued operation of the business. Many times this leads to the Blind Spot of Working Capital (Current Assets minus Current Liabilities) delivered to the Buyer at the closing.

There are three important balance sheet targets that are usually established:

• Cash (if any)
• Working Capital
• Net Assets

Working Capital, at closing, is rarely a concern from the seller’s point of view; establishing a Working Capital Target on the Balance Sheet, delivered at Closing, will require serious negotiations between the buyer and seller.

By not making clear what is being bought or sold, a serious misunderstanding may be created between the buyer and seller. This underlines the need for an experienced M&A professional to assist throughout the acquisition process.