Balance Sheet Analysis

In most merger & acquisition (M&A) transactions, valuations are determined based on the income and cash flow of the company. Furthermore, the character and makeup of the balance sheet must also be assessed when evaluating a company for a transaction. Negotiating balance sheet target values should be an early and meaningful part of Middle Market transactions. These outcomes may significantly alter the value of the total transaction value.

Working capital is generally defined as the current assets less the current liabilities of a company. For purposes of an M&A transaction, understanding and establishing an “adequate” level of working capital is very important and generally included in the purchase price. Typically, cash and bank lines of credit are not included in the calculation of transactional working capital.

There is no standard convention for determining “adequate” working capital in a transaction. Significant differences will occur between the sell-side and buy-side points of view. An experienced M&A team may derive an additional 5% to 15% of the purchase price in negotiating adequate working capital.